Please ensure Javascript is enabled for purposes of website accessibility

2009: End of the Road for Pensions?

By Dan Caplinger - Updated Apr 5, 2017 at 8:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

For companies, they're only getting more expensive.

For years, workers have seen their pension coverage at work get scaled back in favor of alternatives like 401(k) plans. But the final nail in the coffin for pensions may come from 2008's terrible stock market performance.

According to Barron's, a recent report from Credit Suisse asserts that more than 100 companies in the S&P 500 face pension shortfalls, which could result in a significant hit to their earnings during 2009. New pension funding requirements taking effect at the beginning of the year will require higher funding levels, even as pension funds' stock investments have lost a huge portion of their value.

Pension mechanics and you
For workers, one of the advantages of pension plans is your certainty about what you'll receive. Using whatever formula your employer uses, you can make assumptions about your future earnings and determine what your monthly payment should be. When the time comes to start getting payments, it's up to your pension plan to figure out how to come up with your money.

From the employer's perspective, obviously, operating a pension plan takes more work. With workers of all ages often included within a single plan, plan administrators must figure out how much they need to set aside and invest now to cover current and future pension liability.

With new tougher requirements for funding, many companies will need to make up shortfalls. To do so, the company must take charges on earnings -- something no one wants to do, and which companies like United Parcel Service (NYSE:UPS) and Pfizer (NYSE:PFE) are trying to fight by seeking government intervention.

The magnitude of those charges worries some investors. Consider some of the companies affected:

Company

Estimated 2009 EPS Charge

Trailing-12- Month EPS

Northrup Grumman (NYSE:NOC)

$1.74

$5.00

Goodyear Tire (NYSE:GT)

$1.17

$1.26

PPG Industries (NYSE:PPG)

$0.83

$4.03

Source: Barron's, Yahoo! Finance.

Some of these charges look relatively small compared to a typical year's earnings. But coming on the heels of a slowing economy, which will already challenge year-over-year comparisons for many firms, the additional earnings hit from pension-related charges is the last thing anyone wants to deal with.

On the other hand, there are some relatively healthy pension plans out there. Somewhat surprisingly, General Motors (NYSE:GM) is among them; its estimated 96% funding level for its pension puts it above the threshold for immediate funding requirements. Despite facing an $11.7 billion deficit, ExxonMobil (NYSE:XOM) also has the cash on hand necessary to strengthen its plan to required levels.

The beginning of a trend?
Yet the hard times may not be over for pension funds. The credit crunch has pushed corporate bond interest rates upward, even as yields on safer Treasury bonds have fallen to historically low levels. Pension funds can use the higher corporate bond rates to more heavily discount the future value of the liabilities they owe to future pension recipients, thereby partly reducing the amount of assets needed to meet current funding requirements.

If an eventual resolution of the financial crisis brings the currently wide spreads between Treasuries and corporate bonds down to normal, then corporate bond rates could easily fall -- forcing up pension liabilities and requiring more funding. And if the stock market doesn't recover quickly enough, then pension funds -- which keep an estimated 60%-70% of their assets in stocks -- could once again head back to their corporate benefactors for more funding.

Whatever fallout results from pension funding difficulties will just put more pressure on the decreasing number of companies that offer pensions. More of them may shift investment risk away from pension plans, and toward workers through defined-contribution plans. As many workers have learned recently via their 401(k) plan accounts, bearing that investment risk isn't always the best deal for them.

Like it or not, though, when it comes to saving for retirement, employees are increasingly on their own.

More advice on protecting your retirement:

If you're trying to salvage your retirement savings, check out our Motley Fool Rule Your Retirement newsletter. Each month, you'll learn what you need to know to protect your wealth from the bear market and make the most of all your resources. Take a no-obligation free trial for 30 days and see how Rule Your Retirement can help you.

Fool contributor Dan Caplinger never had a pension to lose. He doesn't own shares of the companies mentioned. United Parcel Service, PPG Industries, and Pfizer are Motley Fool Income Investor picks. Pfizer is a Motley Fool Inside Value recommendation. The Fool owns shares of Pfizer. Try any of our Foolish newsletter services free for 30 days. The Fool's disclosure policy won't disappear on you.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Exxon Mobil Corporation Stock Quote
Exxon Mobil Corporation
XOM
$90.75 (2.02%) $1.79
United Parcel Service, Inc. Stock Quote
United Parcel Service, Inc.
UPS
$196.41 (0.16%) $0.32
General Motors Company Stock Quote
General Motors Company
GM
$36.48 (-2.86%) $-1.07
Pfizer Inc. Stock Quote
Pfizer Inc.
PFE
$49.89 (0.65%) $0.32
PPG Industries, Inc. Stock Quote
PPG Industries, Inc.
PPG
$126.91 (-0.59%) $0.76
The Goodyear Tire & Rubber Company Stock Quote
The Goodyear Tire & Rubber Company
GT
$13.32 (-2.02%) $0.28
Northrop Grumman Corporation Stock Quote
Northrop Grumman Corporation
NOC
$474.84 (1.02%) $4.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
379%
 
S&P 500 Returns
123%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/09/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.