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Pension problems will be a major drag on future earnings



April 23, 2009 – Comments (4) | RELATED TICKERS: CBS , GM

While most companies have elimintated their pension programs completely, never had one to begin with, or switched to Defined Contribution plans that stipluate the amount of money that they have to put into the retirement fund rather than the payout, a number of older companies still have problematic Defined Benefit pension plans that are severely underfunded.

MarketWatch's Mark Hulbert published an excellent article on this subject a couple of days ago: Withering shoots? Commentary: Under-funded pensions could prove to be major drag on market.

According to Standard & Poors (yuck), the present value of future obligations of DB plans among the 500 companies in the S&P 500 index amounted to $1.4 trillion at the end of 2008 yet these companies only $1.1 trillion in their actual funds at the end of last year.  This means that S&P 500 companies are were at least $300 billion short on their pension obligations at the start of the year.  I said "at least" in the previous sentence because I don't know what sort of return S&P is assuming that these companies will achieve over the coming years.  It is entirely possible that the assumed rate of return is overly optimistic, in which case the shortfall would be even greater.

We all see billions and trillions of dollars being thrown around with wild abandon lately, so to give you an idea of just how much money $300 billion is, all of the companies in the S&P 500 made $132 billion last year.  The current pension shortfall would wipe out two years worth of earnings if it was spread out evenly amongst all of the companies in the index.  The DB pension plans are actually only available at a small number of these companies.  A number of them are likely going to have a big problem with underfunded pensions and charges related to them going forward.  Or in the case of General Motors they may expect the government to pick up the tab for their pension fund.

Hulbert provided a list of the companies that  indicates may have trouble with DB pensions in the future in his article.  The list includes CBS...I thought about buying some CBS bonds but the company is so messed up I couldn't bring myself to pull the trigger, Eastman Kodak Co (EK), General Motors (GM)...of course, Hershey (HSY), Kraft Foods (KFT)...a company that I actually like but the pension issue would give me pause before pulling the trigger in the real world, News Corp (NWSA), Southwestern Energy Co (SWN), and Time Warner (TWX) / Time Warner Cable (TWC)...a name that many value investors love.

Potential pension issues are definitely something to look into before investing real money in any of these companies.


4 Comments – Post Your Own

#1) On April 23, 2009 at 3:13 PM, XMFSinchiruna (26.56) wrote:

Fellow Fool Dan Caplinger just published a piece on this topic... crazy stuff!

Also, see this Bloomberg article from last month:



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#2) On April 23, 2009 at 3:18 PM, TMFDeej (97.73) wrote:

Thanks for the links, Sinch.  I'll definitely check them out.


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#3) On April 23, 2009 at 3:41 PM, Tastylunch (28.72) wrote:

yeah Pensions are gonna be a big problem. You might want to check out

good aggregate site for info on this problem.

Nice article Deej

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#4) On April 24, 2009 at 11:50 AM, ClandPhoenix (79.07) wrote:

+ 1

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