Just The Beginning!

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Aug 26, 2002
Gersh on Washington

10-14-02: Pension Problems
a special web commentary by NBR Washington Bureau Chief Darren Gersh
(Read his previous articles)

If you were afraid to peak at your quarterly retirement savings statements, imagine how pension managers at S&P 500 companies must feel. A new report from Credit Suisse First Boston estimates pension plans at companies in the S&P 500 will be underfunded by $243 billion by the end of the year. Put another way, CSFB expects 325 of the 500 companies in the S&P 500 may not have enough assets on hand to match their pension obligations.
It''s no surprise really that most of the pain is concentrated in the old economy - airlines, autos, drug makers, oil and gas. After all, the new economy companies (140 of the S&P 500) are new enough to take advantage of 401(k) plans and pass the underfunding problem directly to their employees.
What is a surprise is just how bad the problem is. Every big company with a defined pension plan is required to estimate the return they expect on plan assets. Right now, the median expected rate of return is 9.2%. CSFB estimates taking that expected rate of return down by half a percentage point would increase the aggregate pension costs of the S&P 500 by $5 billion. Now bear in mind that Warren Buffett has suggested a more realistic rate of return for corporate pension assets would be 6.5%. At that level, pension costs would jump to $30 billion.
During the bubble years, corporate pension plans were flush with inflated assets. As return rates soared, companies did not have to put as much cash into their pension plans. That helped boost earnings through much of the last decade.
Some money managers consider the number management chooses for the expected return on pension assets to be a good barometer of whether the company is playing fair with shareholders. Assuming a high enough return makes pension problems disappear and earnings reappear. That may work for a while, but eventually real people begin retiring and demanding real cash. But by that time, there''s probably a new management in place anyway.
CFSB predicts 2003 will be the year the music stops for pension plans. Accounting analyst David Zion predicts S&P 500 companies will have to increase their cash contributions to their pension plans by $14 billion. I suspect most of those companies will explain the increase by blaming it on the bear market. They are unlikely to admit their forecasts were too rosy all along.
For most companies, this is a return to reality, not a crisis. CSFB estimates of the 360 S&P 500 companies with defined benefit pension plans, 33 are overfunded, and another 94 have minimal exposure.
But just look at some of the numbers: AMR''s pension is underfunded by $3.4 billion dollars, but the company is worth just $560 million. Delta Airlines is worth $1.2 billion, but it''s pension needs another $4.4 billion. General Motors pension plan is estimated to be underfunded by $29 billion dollars.
Now doesn''t that put the losses in your 401(k) in perspective?
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Thank you so much for pointing out the legal but criminal activities that large corporations are able to carry out.
Try to get legislation in place that does NOT allow a corporation to write off the expense of their NON - Funded plan today, only for you to find out your GAZILLION dollar pension sucks.
ALPA, Teamsters, ILWU, IAM and etc. requires the funds to be PAID TODAY for tomorrows benefit. Not the way the APFA has allowed you to sink. THE APFA has allowed you, and helped you to sink, all the while holding up a weak fist to the wind about B.S. .
Check it out, your pension money, unless it is in your control, vested, tucked away and out of AA's control is at serious risk. If they have a giant bond, outside the PBGC, that would be great. If allowed by law, get your money out AA's hands and into a private fund. Make sure you are not penalized.
If there is something about the F/A retirement I am missing and have misquoted, please enlighten me.
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