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No Relief Likely for Huge Pension Underfunding


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PhoneCall David Nolte at (213) 787-4100


Expert Witness: Fulcrum Inquiry
With the end of the year just weeks away, many companies having traditional pension plans face a significant problem with woefully underfunded pension plans. Because of falling stock market values, lower investment (interest) returns, and changes in pension funding from a 2006 law, most employers with these plans will need to make significant additional contributions. Appeals for legislative change will not occur under the Bush administration.
With the end of the year just weeks away, many companies having a traditional pension plan face a significant problem with woefully underfunded pension plans. Because of falling stock market values and lower investment (interest) returns, most employers with these plans will need to make significant contributions to their pension plans in 2009. These same companies will be required to recognize their pension plan deficits on their balance sheets.

The increased funding is required under the Pension Protection Act of 2006. Under this 2006 change, employers must contribute enough money to their plans each year so that liabilities are fully funded after seven years. That is a big change from prior law, in which (i) plans only had to be 90% funded to be considered fully funded, and (ii) employers had 30 years to amortize those liabilities. The new 100% funding target is being phased in. In 2008, employers had to hit a 92% funding target; in 2009, the funding target is 94%. If an employer misses any funding target, that employer’s target then increases to 100%.

These increased funding obligations coincide with cash flow problems many companies are facing because of the recession, which means these employers will have fewer resources for the business investments that help keep and create jobs. Based on this thinking, nearly 300 companies, unions, and trade associations urged Congress to give temporary relief from pension contribution requirements. Their comments included:

“The drop in the value of pension plan assets coupled with the current credit crunch has placed defined benefit plan sponsors in an untenable position. … At a time when companies desperately need cash to keep their businesses afloat, the new funding rules will also require huge, countercyclical contributions to their pension plans. Consequently, many companies will divert cash needed for current job retention, job creation and needed business investments, and instead contribute the cash to their pension plans to fund long-term obligations due many years after the current market conditions return to normal. We do not believe that, in enacting the Pension Protection Act of 2006 (“PPA”), Congress intended companies to be forced to make this kind of decision. Unless the funding rules are modified, they will cause an increase in unemployment and slow economic recovery. …”

We are in no way advocating an overhaul of the (Pension Protection Act of 2006) funding changes. Rather, we urge Congress to consider … adopting temporary provisions that deal with the financial crisis facing us today.”

It is pretty clear that the funding adjustments requested in the above appeal will not occur – at least until the Obama administration is in power. Despite bipartisan support and proposals in both houses of Congress that would have decreased funding requirements, the Bush administration opposes any such change. The Administration correctly highlights that allowing companies to decrease current funding could cause plans that are already significantly underfunded to grow even more underfunded over time. This could translate into what the Administration claims is estimated $3 billion in new claims placed on the Pension Benefit Guaranty Corporation (PBGC) over the next decade. Putting aside the taxpayer cost of a PBGC bailout, the Administration also indicated concern that certain “workers would lose billions in unfunded pension benefits not guaranteed by the pension insurance system”.

The Underfunding Amounts are Staggering

Pension consulting firm Mercer estimated that (at the end of November 2008) defined benefit plans at the S&P 1500 companies lost almost $300 billion in asset values since the stock market high. This causes the combined pension deficit of these S&P 1500 companies to reach an all-time high of $280 billion.

Another study by Credit Swisse offers similar conclusions, but focuses on the narrower group of S&P 500 companies. According to Credit Swisse, funding at these companies dropped $265 billion so far this year. About 340 of the S&P 500 companies have shortfalls, and 227 of these companies are less than 80% funded.

ABOUT THE AUTHOR: David Nolte
Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.



Fulcrum Inquiry is a financial consulting firm that performs forensic accounting, business valuations and economic analysis.

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While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.
For specific technical or legal advice on the information provided and related topics, please contact the author.

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