U.S. companies face pension shortfalls, and the problem will
only get worse unless the stock market keeps rallying, according to
a new report.
Delta Airlines, advertising company Omnicom Group, and chemical
firm Nalco are among the worst-funded companies, with less than
half the sufficient amount of money set aside to cover future
payouts, according to Fitch Ratings.
Fitch, whose research is mainly used by corporate-bond investors,
said the pension plans at 144 of the 220 companies it tracks were
less than 80 percent funded. That puts means they could be
considered "at risk" under the Pension Protection Act of 2006.
The main takeaway of the study is that investors should check
annual reports for information about pension obligations. While
it's unclear how the liabilities will affect any individual
company, they're likely to become increasingly relevant as 2011
approaches because that's when the requirements of the law are
scheduled to take full affect.
"The report is an attempt to make people aware there could be an
increase in these outflows to company pension plans, and it's not
really clear what the amounts will be," said John Culver, a
co-author of a report on the subject. "Cash going to plans is not
available for the companies to reinvest in their businesses or to
buy back stock."
Because they are funded mostly with equities and corporate bonds,
pensions lost 29 percent of their value between December 2007 and
December 2008, according to Federal Reserve data.
The collapse occurred shortly after the Pension Protection Act
raised the bar for funding requirements, similar to what happened
with fair-value accounting for financial institutions under FASB
157. Congress waived some of the rules in late 2008, and an
extension of that move is now being considered.
"If there is continued downward pressure on the equity markets,
that's going to increase future funding requirements," Culver
Other companies with low levels of pension funding include
American Axle & Manufacturing and Masco at 58 percent and
Mattel 59 percent.
(Chart courtesy of tradeMONSTER)