By PAMELA GAYNOR
April 27, 2005
But even the lucky few with pensions have reason to wonder about their safety.
The number of companies reporting pension deficits that would exceed $50 million if they were terminated has more than doubled the last five years, pushing the aggregate deficit to $270 billion, 15 times the 2000 level, according to the Pension Benefit Guaranty Corp., the federal agency that insures private pension plans.
Moreover, some analysts insist that even plans that look healthy might not be if the assumptions underlying them, such as the projected return on investments, prove too rosy.
Some people who have lost pension benefits amid corporate shutdowns know that all too well.
When the former St. Francis Health System collapsed three years ago, its flagship hospital's 2,980 pension participants lost about a quarter of their promised benefits that way, according to attorneys who represented them in a class-action suit. Worse, unlike most private pension funds, St. Francis' plan was not insured by the PBGC because it had won an exemption from premiums based on its religious affiliation.
To be sure, most companies aren't going out of business, as St. Francis did. But that doesn't mean their pension plans can't run into trouble and even help drag them into bankruptcy.
The stock market's collapse earlier this decade wreaked havoc on lots of pension funds by lowering their investment returns.
On the positive front, the condition of many pensions have improved in the past year.
A survey of 100 of the nation's largest corporations by Milliman Consultants and Actuaries found that pension plans on average at the end of last year contained about 91 cents for each dollar of benefits they project they'll need to pay, up from 89 cents in 2003 but well below the average $1.30 in 1999, when stocks were still soaring.
The average, of course, covered extremes: FPL Corp., parent of Florida Power & Light, had the highest pension-plan funding, at nearly $1.84 for every dollar it projects in benefits, while Cincinnati-based Proctor & Gamble had the lowest, at 49 cents for each dollar it expects to owe beneficiaries.
What do the numbers mean? A plan that isn't fully funded at any given point isn't necessarily one that won't be able to fulfill its commitments.
For example, if a healthy company decides to increase pension benefits for employees, it takes a while before contributions and assets catch up, said Bill Daniels, a pension consultant with Towers Perrin in Pittsburgh.
Daniels said funding levels also shouldn't be separated from a company's ability to earn money and increase earnings. Just as a homeowner's ability to pay mortgage debt is based on income, so, too, is a company's ability to fund its pension obligations.
Even though they are not fully funded, for example, pension plans at Alcoa and U.S. Steel are relatively healthy, Daniels said. According to the Milliman study, Alcoa's plan contains 82 cents for each dollar of future benefit obligations and U.S. Steel's has 95 cents for each dollar it expects to owe.
Overall, Daniels said, the number of healthy pension plans far outweighs the number of sick ones.
But Ronald Ryan, who heads Ryan ALM, a New York pension consulting firm, said even plans that appear healthy may have problems that don't meet the eye.
Ryan said pension statements filed with the Internal Revenue Service suggest pension-fund assets are overvalued by as much as 20 percent and liabilities are understated by as much as 17 percent. The IRS data differs from data used in the Milliman study because it is computed under some different accounting rules than those used on the corporate financial statements.
Among other differences, the IRS allows pension plans to value assets on a rolling average over several years, whereas corporate financial statements contain year-end market values.
The federal agency that insures private pension plans relies on the IRS data, and even the financial statements used by Milliman point out some of the same problems, Ryan said.
The health of corporate pension plans is judged under a tangle of complex accounting rules and actuarial assumptions, which Ryan calls misleading and blames for potential funding problems.
Just one example is the way future liabilities may be valued: A change in federal law last year allowed companies to peg the so-called discount rate that corporations use to calculate the present value of future liabilities to a composite of corporate bond indexes, rather than to yields on long-term government bonds.