UPDATE: Earnings Reports Start Reveal Ugly Pension Costs
January 28 2009 - 3:33PM
Dow Jones News
There have been warnings for months about the severity of U.S.
corporations' pension underfunding, but this week's round of
earnings reports showed just how badly retirement plans will weigh
on the companies that operate them.
From the furnaces of United States Steel Corp. (X) to the
newsroom of publisher New York Times Co. (NYT), the effects of
2008's crushing market on pension assets was laid out in year-end
earnings in recent days.
On Tuesday, U.S. Steel revealed it sees total costs for pension
and other benefit plans for 2009 at $360 million, up nearly 60%
from 2008. New York Times disclosed Wednesday its pension is
underfunded to the tune of $625 million, an amount that it will
have to begin paying down in 2010 if markets don't magically
reverse course and repair the damage this year.
The pair join a wide range of companies hit by pension problems.
On Monday Kimberly-Clark Corp. (KMB) said it won't repurchase stock
this year because of a sharp increase in pension costs. For 2009,
the company expects pension expense of about $295 million across
all company defined benefit plans, an increase of $200 million from
2008. Cash contributions to the plans in 2009 are expected to be
about $530 million versus $130 million in the previous year. The
maker of Kleenex tissue said the increase in its pension expense in
2009 amounts to about 34 cents a share.
Investors have been expecting food companies to benefit from
lower prices for raw materials like grain and oil. But higher
pensions costs could dash those hopes.
Hershey Co. (HSY) said Tuesday that higher pension expenses will
more than offset the benefits it will see from falling commodity
prices. The candy maker is projecting a year-over-year increase in
2009 pension expense of about $70 million, or about 20 cents a
share.
In coming weeks, as companies report their earnings, there could
be more such warnings. A Credit Suisse analyst on Wednesday cut its
2009 estimates for Kraft Foods Inc. (KFT) and Kellogg Co. (K) on
expectations of higher pension expenses. The analyst cut his Kraft
estimate to $1.97 a share from $2.00 and the numbers on Kellogg to
$3.13 from $3.15 based on new assumptions for pension expense.
The pensions' losses couldn't have come at a worse time. With
the worldwide economic slowdown, some companies' operating
businesses are already under pressure; New York Times' debt was
recently downgraded to junk.
"The economic factors last year were so significant, and so
broad-based, that few sectors that have these plans will be
unaffected" by pension grief, said Cynthia Mallett, a vice
president in MetLife Inc.'s (MET) corporate benefit funding
group.
There's no doubt there will be more ahead as companies lift the
curtain on their year-end earnings in the days and weeks ahead. The
combination of declining asset values and higher interest rates'
upward nudge to retirement liabilities is unlikely to leave many
companies smugly looking at a fully-funded pension.
While some firms, such as Times Co., will have some breathing
space before they have to start making up the funds' shortfalls,
many others will have to start pumping cash into their retirement
plans in 2009.
Studies that estimated the level of pension underfunding last
year all pointed to a similar downturn. Standard & Poor's in
late December forecast that S&P 500 company pension funds would
be short by $257 billion, easily surpassing the record $219 billion
underfunding set in 2002. Mercer said at the beginning of this
month that S&P 1500 companies' pensions suffered losses of an
estimated $469 billion over 2008, causing an aggregate surplus of
$60 billion at the end of 2007 to be replaced by an estimated
aggregate deficit of $409 billion at the end of 2008. The study by
Mercer also showed that pension expense is likely to increase from
$10 billion in 2008 to an estimated $70 billion in 2009.
Earlier this week, pension consultant Watson Wyatt Worldwide
Inc. (WW) calculated that globally, pension balance sheets
deteriorated by about 29% in 2008 and fund assets in 11 major
markets shrank back to below 2005 levels.
While the various forecasts measure different groups of
companies, they all hew to the same directional trend, say pension
consultants. The initial earnings report revelations in recent
weeks indicate the predictions are mostly on target - pension plan
underfunding will likely turn out as forecast, no better, no worse,
says Alan Glickstein, a senior retirement consultant with Watson
Wyatt.
"I don't think there's been any great level of unexpected
revelations in the funded status than we had been predicting," said
Glickstein. "So far, things seem very consistent with what we
forecast, and very sad."
(Anjali Cordeiro and Nat Worden contributed to this report)
-By Lynn Cowan, Dow Jones Newswires; 301-270-0323;
lynn.cowan@dowjones.com
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