Threat to US pensions

Wow! Just look at these stunningly huge shortfalls at major corporations. As I've said again and again, pensions and "retirement" are disappearing fast. To survive, more and more people will find themselves resorting to "System D." -- Rice Farmer

Pension Threat: The Looming Crisis Facing Investors

CNBC,

2 February, 2012

It’s no secret that the financial crisis and resulting malaise has taken its toll on bank stocks, commodities and Treasury yields.

But it may be have triggered another ripple – one that has gone somewhat unnoticed.

Pension funds have become seriously underfunded. According to a recent report from Credit Suisse some of the nation’s largest companies owe their pensions more than 25% of their market cap (after taxes).

Pension Shortfall as Percentage of Market Cap

AK Steel (99%)

ITT (83%)

Goodyear Tire (67%)

United States Steel  (59%)

Sears (43%)

Lockheed Martin (39%)

Supervalu (39%)

Computer Sciences (37%)

Whirlpool (33%)

Ford Motor (32%)

Alcoa (30%)

Donnelley (29%)

Textron (27%)

Raytheon (25%)

Source: Credit Suisse

Although the problem is complex, at its core is simple math. Many firms forecast returns of 8% annually. And that just hasn't happened.

This developing situation is potentially market moving because it could require companies to make larger contributions – much larger. And if contributions ‘do’ go up, the money will have to come from someplace on the balance sheet.

“A pension accounting change at UPS [UPS  76.70    0.32  (+0.42%)   ] will result in $527 million after tax charge in 2011,” says Joe Terranova. "And Sunoco said they have to contribute $80 million into their pension funds."

In other words, the need to fund pensions could drag down profits and, in turn, share price.

In fact, the pension liability at AK Steel [AKS  8.79    -0.25  (-2.77%)   ] was cited by BofA as a reason behind their recent decision to downgrade the stock to ‘Underperform’ from ‘Neutral.”

“I think in 2012 it will be a recurring issue,” Terranova says. 

John Ehrhardt of Milliman confirms the thesis. He tells us that investors should expect record numbers of earnings charges in 2012.

“Record low interest rates result in historically high liabilities and the only remaining lever may be employer contributions.”

And according to Ehrhardt this may be just the tip of the iceberg. "These companies are going to need 20-30% returns to fill the kinds of gaps we're talking about."