Many younger workers, say those that have entered the
workforce from the 1990s through today, probably will not receive
a defined benefit pension when they retire. Younger workers are
not unfamiliar with defined pension plans. They have heard of
them, probably by way of their parents or grandparents.
That is to say the number of U.S. companies paying defined
benefit pensions has dwindled over the years. Unfortunately for
investors, companies' pension obligations have not dwindled and
underfunding of pensions is on the rise. One culprit is the low
interest rate environment.
"Discount rates for pension liabilities dropped from 7.4% in
1999 to 4.7% in 2011 This translates to a 190% increase in
liabilities for a typical plan,"
according to J.P. Morgan research
Return assumptions that were too rosy are another culprit.
Some companies left plans underfunded assuming the go-go days of
the 1990s equity markets would return.
"If pension assets had grown at the typical plan's expected
rate of return, the assets would have increased by 182%,
resulting in minimal shortage. In contrast, pension assets grew
only by 69%," J.P. Morgan noted.
As of the third quarter of 2012, 338 S&P 500 companies
paid defined benefit pension plans, but only 18 were fully funded
while seven were underfunded by $10 billion or more,
the New York Times reported
Indicating that misery often loves companies, some of the most
egregious pension offenders can be found in the same sector. That
means ETF investors need to be aware of which sector funds have
potential pension problems.
Industrial Select Sector SPDR (NYSE:
) The Industrial Select Sector SPDR is littered with companies
that trying to deal with underfunded pensions. Alone, Dow
component General Electric (NYSE:
) represents 12.2 percent of XLI's weight and that company's
defined benefit pension plan was underfunded by $21.6 billion as
of the third quarter of last year, according to the New York
Fellow Dow components 3M (NYSE:
) and Boeing (NYSE:
) saw their pensions underfunded by $2.4 and $2.6 billion
. Those stocks combine for over eight percent of XLI's
Lockheed Martin (
), another XLI constituent, is among the U.S. firms that had a
pension plan underfunded by $10 billion or more as of last
Market Vectors Steel ETF (NYSE:
) The Market Vectors Steel ETF does not focus exclusively on
U.S.-based companies. Three foreign companies - Rio Tinto (NYSE:
), Vale (NYSE:
) and Posco (NYSE:
) combine for over 31 percent of the ETF's weight and are the
fund's top three holdings. That does not mean SLX does not have
pension issues of its own.
) said on its most recent earnings call its
underfunded pension liabilities were almost $400
million at the end of last year
. That stock accounts for over five percent of SLX's weight and
is a top-10 holding in the fund.
AK Steel (NYSE:
) paid about $170 million in pension obligations last year and
that number is expected to jump to $180 million this year and to
$240 million in 2014
The cases of Timken and AK Steel pale in comparison to US
), which has $5.2 billion in pensions and other
post-employment benefits to deal with
Alarmingly, US Steel assumes a stout rate of return on assets
with which to fund the pension. In 2011
the company expected an eight percent return on
. That is high by any standard and those returns are likely not
achievable year in and year out.
iShares Dow Jones U.S. Telecommunications Sector Index Fund
) Earlier this month, AT&T (NYSE:
) said it would take a $10 billion charge against its
fourth-quarter earnings related to its pension plan. Citing an
uncertain economic outlook for 2013 the telecommunications giant
lowered its expected return on plan assets.
AT&T is not the only telecommunications pension offender.
At the end of 2011
one analyst estimated
Verizon could see pension liabilities of $31.6 billion.
In the case of Verizon, the company said it planned to
contribute $1.26 billion to the underfunded plan last year, up
from $400 million in 2011. The added problem for both companies
is that if they cannot get above the 80 percent funded
requirement, the Pension Protection Act mandates employer
contributions to bring the plan closer to full funding. AT&T
and Verizon combine for over 19 percenet of IYZ's weight.
For more on
(c) 2013 Benzinga.com. Benzinga does not provide investment
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