Welcome to the latest offshoot of the subprime-mortgage debacle: A burgeoning U.S. pension-fund crisis.
Since the global financial crisis struck last fall, the largest 1,500 U.S. public companies have lost a combined $280 billion from their pension funds. Assuming the stock market doesn’t move much from here, a typical U.S. company can expect its pension expense – a direct charge against profits – to increase between 20% and 30% in 2009.
With such a hefty burden ahead, it’s not difficult to understand that this pension fund crisis will certainly exert a downward pressure on corporate earnings, and doubtless on stock prices, too.
But there is a silver lining: By choosing your stocks carefully, you can dodge this pension-fund crisis altogether. To make sound choices, it’s first necessary to have some knowledge of pension systems, and the funding crisis that’s brewing up like a summer squall.
Pension-Fund Proliferation Leads to Pension-Fund Crisis
The pension fund problem emanates from the huge expansion of pension funds after World War II, when companies saw additional pension promises as being cheaper than cash wage increases. And they were cheaper: Big industrial companies like General Motors Corp. (GM) were growing rapidly, meaning they had relatively young work forces who could be expected to pay pension contributions for many years before being eligible to receive pensions.
Add a certain amount of old-fashioned sloppiness in the accounting – for instance, the total value of pension liabilities didn’t have to be reported at all until 1985, and have only been brought onto the corporate balance sheets under the recent pension-focused accounting rule, SFAS 158 – and you can see why defined-benefit pension plans, in which workers got a benefit based on a percentage of final salary, were popular with all concerned.
The defined-benefit pension system got into serious trouble in the 1980s – thanks to some developments from the decade before. Under the ERISA Act of 1974, employers were forced to make payments to the Pension Benefit Guaranty Corp., so employees would be paid if the employer went bust.
