Corporate Pension Funds Look To Congress For Help
Like municipal and state pension funds, corporate pension funds across the country are reeling from the effects of the economic downturn. Now, some businesses, including Pfizer Inc., International Business Machines Corp., United Parcel Service and others are taking their case to Capitol Hill, pleading before lawmakers to suspend a federal rule that requires them to infuse billions of dollars into company retirement plans in order to make up for this year’s massive losses in the stock market.
Skeptics, however, aren’t buying the latest outcry from Corporate America. As reported Dec. 8 on Bloomberg, some financial experts believe corporations simply are using the current financial crisis as an easy scapegoat to bypass a 2006 law that mandates increased retirement-funding provisions.
Others contend many pension fund money managers took far too many risks regarding certain investments, and funds that stuck with prudent and conservative investment strategies were better able to mitigate major market losses.
“This is a failure of risk management by America’s pension plans,” said Jeremy Gold, founder of Jeremy Gold Pensions, a New York-based actuarial consulting firm, in the Bloomberg article.
“They failed to reduce their exposure to the equities markets, they continued to gamble, and they lost the gamble,” he said. “So like all the other losers, they’re standing on the Capitol Hill steps, saying ‘Help!’”
Gold has a point. Market forces aside, the success of a pension fund is contingent on the entities managing the fund’s assets. As more pension fund losses come to light, it’s apparent that some of this work has been severely flawed - from inappropriate bets on risky investments such as collateral debt obligations to the methods used to determine the value of a fund’s assets.
New Funding Levels
Compounding the problems for pension funds is the Pension Protection Act of 2006, which dictates new minimum funding standards for pension funds. By the end of this year, the funding level will be 92%. By 2011, it goes up to 100%. For companies that fail to reach the required funding threshold in any given year, a stiff penalty will be imposed. Pension plans that enter an “endangered status,” meaning they fall below an 80% funding level, face even tougher sanctions, including the possibility of immediate lump-sum payments.
A recent analysis by the consulting firm Mercer LLC shows that some 800 companies in Standard & Poor’s 1500 Index have pension funds. Collectively, the companies were nearly $300 billion short of the funds needed to pay projected benefits as of Nov. 30. By comparison, the same funds started out 2008 with an estimated $60 billion surplus.
“Some companies have already taken steps to address pension plan financial risk by modifying their investment and contribution strategies,” says Adrian Hartshorn of Mercer’s Financial Strategy Group. “However, many companies have not yet addressed the issue, or the steps taken to date have proved inadequate in the current market conditions.
“Changes in the value of pension plan liabilities not matched by changes in the value of plan assets will result in pension plan surpluses or deficits,” he adds. “If companies are unable to tolerate the impact of the changing financial position of the plan, company management needs to manage the risk, much as it would manage any other risk in the business,” Hartshorn says.
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