The 'Crisis' in Pension Plans May Not Be a Crisis After All Wall Street Journal (11/26/02) p.A1; Schultz, Ellen E.; Squeo, Anne Marie
Media reports about failing and underfunded pension
plans coupled with recent corporate scandals have frightened many
investors into seeking out more information about how pension
plans affect companies' bottom lines. In general, the most
heavily affected industries--steel, automobile manufacturers, and
airlines--offer defined benefit plans, which were hit hardest by
the stock market and interest rate decline, which reduced the
plans' assets and increased their liabilities, respectively.
Those companies in Standard & Poor's 500 index, which saw
pension assets fall from $235 billion in 2000 to just $4 billion
in 2001, will not exhaust their pension fund assets for about 12
years, and that is even if they do not infuse them with further
funds. Moreover, firms' desire to inform investors in light of
the recent corporate scandals has exacerbated the problem.
Lockheed Martin Corp. informed investors that its pension plan
would generate between $50 million and $100 million in costs
rather than contribute $150 million to the bottom line like it
did in 2001, which sent shares falling. However, investors
should be more concerned with earnings rather than potential
shortfalls in pension plans that do not often affect the bottom
line; shares tumbled 4 percent for Lockheed despite quarterly
earnings increases of 36 percent.
Analysts contend that companies are using underfunded pension plans as an excuse to cut
retiree health care and other benefits to reduce labor costs, and
investors should beware that expected rate of returns calculated
in the previous year could hurt company earnings indirectly if
liabilities increase while pension returns continue to decline.