Pension plans wither with stocks

Many companies are having to contribute to plans that in the '90s were brimming with cash.

By HELEN HUNTLEY, Times Staff Writer

© St. Petersburg Times
published September 19, 2002

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Watching their savings shrink along with the stock market, workers covered by traditional pension plans have had reason to thank their lucky stars. Even if their 401(k) plans dwindle to nothing, they still earn pension benefits to supplement their Social Security.

But the companies that sponsor pension plans are not feeling so lucky. As a result of investment losses, many plans that had been flush with cash now have less in assets than the value of promised benefits. To make up for their losses, companies of all sizes are having to contribute more to their plans, some making their first contributions in years.

Walter Industries Inc. and AmeriSteel Corp. of Tampa and Superior Uniform Group Inc. of Seminole are among publicly traded companies in the Tampa Bay area that are being forced to kick in funds to make up for a shortfall.

They have plenty of company. Nationally, unfunded pension liabilities jumped to a record $111-billion last year, according to the federal Pension Benefit Guaranty Corp.

With 401(k)s and other savings plans, employees put up most of the money and take all the risk. If their investments wither, they suffer. These days, that's the only type of retirement plan many companies offer.

With traditional pension plans, companies promise to pay a set income at retirement. The company, not the employees, reaps the benefits or shoulders the risk of investment returns. In good years like most of the 1990s, many companies do not have to contribute a dime to keep their pension plans financially healthy.

"Because the stock market did so well and assets well exceeded liabilities, a lot of companies have been on a contribution holiday for years," said Michael Jones, who manages the Tampa office of benefits consultant Hewitt Associates. "For a lot of organizations, we're seeing that pension income is now turning into pension cost."

While pension experts say the "unfunded liabilities" do not yet represent a threat to future benefits, they do represent an impending hit to company coffers.

"It doesn't affect benefits; it affects our expenses," said Andrew Demott, chief financial officer at Superior Uniform Group. The company put $37,000 in its pension plan last year, its first contribution in many years. This year the required contribution will be larger, he said.

At Walter Industries, company contributions to the pension plan increased from $3.3-million in 2000 to $6.4-million last year and are expected to go up again this year. But even though the company contributed more last year, the plan went from a $54-million surplus to a $30-million deficit.

For the first time since the mid 1980s, the Times Publishing Co., which publishes the St. Petersburg Times, has been forced to make a contribution to its pension plan.

R. Michael Carroll, chief financial officer, said the company contributed about $3-million this year to its fund, which covers about 2,800 retirees and current staffers. Times Publishing is owned by the Poynter Institute, a nonprofit school for professional and student journalists.

"Though we had some market challenges in the last couple of years, we have reacted to those appropriately," Carroll said. "Our pension plan is fully funded."

The pension deficits at Tampa Bay area companies are modest compared with those at some big corporations, such as General Motors Corp., where the value of promised benefits exceeded the plan's assets by about $9-billion at year end.

"Pension plans by their nature shift from being overfunded to being underfunded, depending on how returns go," Walter Industries spokesman Kyle Parks said. He said the company stands behind its commitment to contribute enough to the plan to pay promised benefits.

Companies are not required to offer pension plans, but if they do, federal law requires them to comply with the rules established for their plans. That includes paying benefits employees already have earned through their years of service. The federal government, through the Pension Benefit Guaranty Corp., guarantees most benefits when companies with underfunded plans go bankrupt.

Some private companies are contemplating freezing or eliminating their plans because the cost of keeping them in compliance with federal law has increased so dramatically, said Leon Smith, an actuary with Matthews Benefit Group in St. Petersburg.

"It's not uncommon to see cash requirements triple or quadruple," he said. "We have some people say they just want to get out of their plans, but you can't get out without contributing."

He said some cash-strapped companies are freezing plans so employees stop accruing new benefits. While that does not reduce this year's costs, it does cut costs for the future. A company can terminate a plan by purchasing annuities for covered employees or paying them lump sums based on the benefits already earned.

The cost squeeze could accelerate the movement away from traditional pension plans. Twenty years ago, about 40 percent of private-sector workers were covered by a traditional pension. Today about half that many are, and many of them will not stay on the job long enough to earn a significant benefit. Government workers are more likely to be covered.

Companies are not required to make up shortfalls in one fell swoop, but IRS rules require that they accelerate contributions to address them. GM will have to put more than $2-billion into its plan this year, said John Ehrhardt, a principal and actuary for the consulting firm Milliman USA in New York.

"Pension plans are going to affect some business decisions as companies see the need to generate cash," he said. "They might be diverting cash from reinvestment or new lines of business. They might delay acquisitions."

Low interest rates exacerbate the problem because they increase the current calculated value of the promised future benefits. That means liabilities are going up at the same time as investment income is going down.

For public companies and some private companies, the impact goes beyond the cash needed to fund their plans. Under the accounting rules they are required to use, these companies count the expected return on their pension funds when they calculate corporate income. All of them have been expecting a lot more than they have been getting.

Last year the big companies in the Standard & Poors 500 Index collectively expected to earn 9.2 percent on their pension investments, but actually lost 6.9 percent. Nevertheless, the projected returns generated phantom income equal to 8.2 percent of operating income at companies with pension plans, according to calculations by Morgan Stanley. At the same time, pension surpluses dwindled from $235-billion to $4-billion.

For example, Progress Energy Inc., the parent of Florida Power of St. Petersburg, expected to earn $169-million on its pension plan last year, but actually lost $86-million. However, the expected 9.25 percent return permitted the company to add $47-million to its income after subtracting pension expenses.

Using an expected return rather than the actual return smooths out year-to-year fluctuations. Differences between expected and actual returns are gradually factored back into the calculations. Last year company financial statements were still benefiting from the excess returns earned during the 1990s, but this year that cushion is pretty much gone, Ehrhardt said.

"Losses this year will hurt more," he said.

The stock market is on track for its third straight losing year, but expected returns have yet to reflect that. Like their counterparts nationwide, Tampa Bay public companies that have traditional pension plans have typically used expected returns between 9 and 10 percent. One, Walter Industries, actually raised its expected return last year, from 9 to 10 percent.

Many companies are now deciding what number to use for the current year, but consultants with Milliman say they don't expect more than minor adjustments.

"We've had some debate about it," said Mark Mulhern, vice president of strategic planning for Progress Energy Corp. in Raleigh, N.C. Last year Progress Energy used an expected return of 9.25 percent. "Our view is that we set these rates over long periods of time so we don't adjust them for what may be considered short-term aberrations in the market."

But others say the outsized returns of the 1990s were the aberration.

"We prefer to err on the side of conservatism," Superior Uniform CFO DeMott said. "When the market was returning 15 to 20 percent some years, we still were at 8 percent. You had to know that at some point there would be a couple years like we're seeing now."

Both expected and actual returns are closely tied to the stock market because that's where pension plans keep most of their money. A typical plan has 50 to 70 percent of its assets in stocks. Those with more employees nearing retirement often are more heavily invested in bonds.

The longer the stock market stays down, the more companies will be required to dip into cash to fund their plans. While automakers and airlines face some of the biggest challenges, the issue is one that crosses all industries and confronts companies of all sizes.

It's also one that may have investors paying more attention to the pension footnotes in companies' annual reports to the Securities and Exchange Commission.

-- Times staff writer Kris Hundley contributed to this report. Helen Huntley can be reached at huntley@sptimes.com or (727) 893-8230.

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