Tags: Credit-Suisse | S&P-500 | Pensions | Underfunded

Credit Suisse: S&P 500 Pensions Most Underfunded Since '99

Thursday, 23 Sep 2010 10:02 AM

U.S. corporate pensions face their biggest funding shortfalls since at least 1999, forcing companies to use profits and cash stockpiles to pay retirees instead of investing in their businesses, according to Credit Suisse Group AG.

Defined-benefit pension plans at companies in the Standard & Poor’s 500 Index are probably 75 percent funded, below the previous trough of 78 percent in 2008, leaving a total $402 billion in shortfalls, analysts David Zion and Amit Varshney estimated. Pension costs may keep rising next year, threatening earnings at 265 companies including Boeing Co., they said.

“Earnings estimates may have to come down,” the analysts wrote in a note dated Sept. 21. “Unless we see a spike in yields on high-grade bonds or a stock-market rally in the fourth quarter, it looks like the health of most pension plans will deteriorate this year,” and “pension contributions could become more of an ongoing drain on cash which may not be reflected in the market’s expectations.”

Corporate pensions have suffered after the S&P 500 posted its first negative total return over any decade and the Federal Reserve cut its benchmark interest rate to a record low in December 2008.

S&P 500 companies’ pension funding levels may have dropped $134 billion this year as bets on higher interest rates went awry and the stock market weakened, the analysts said. The benchmark for U.S. equities is up 1.7 percent this year while the yield on the two-year Treasury note touched a record low. The S&P 500 posted an average decrease of 0.9 percent a year from 1999 to 2009, including dividends, the first negative return for a decade since data began in 1927, according to S&P analyst Howard Silverblatt.

Pension Obligations

Pension costs for S&P 500 companies will increase to $53 billion in 2011 from $40 billion this year, Zion and Varshney forecast. As a result, 95 companies could have their earnings cut by at least 5 cents a share next year, assuming a 35 percent tax rate. Boeing, the world’s second-biggest commercial-jet builder, may see a reduction of 12 percent, or 57 cents a share, from the average analyst estimate, Credit Suisse said.

Other S&P 500 companies where 2011 earnings could fall more than 10 percent from analyst estimates because of pension obligations, according to Credit Suisse’s projections, are Vulcan Materials Co., Marsh & McLennan Cos., New York Times Co., Northeast Utilities, Honeywell International Inc. and Deere & Co.

“Higher pension costs could be one reason why 2011 earnings estimates may have to come down and we would expect some companies to start taking down their 2011 guidance when they announce third-quarter earnings,” the analysts wrote.

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U.S. corporate pensions face their biggest funding shortfalls since at least 1999, forcing companies to use profits and cash stockpiles to pay retirees instead of investing in their businesses, according to Credit Suisse Group AG.Defined-benefit pension plans at companies...
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2010-02-23
Thursday, 23 Sep 2010 10:02 AM
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