Pensions, prepare!

It’s crunch time for corporate pensions in the US, as companies start implementing the early stages of the Pension Protection Act of 2006 ( PPA) at what is quite feasibly, the worst possible time.

To reprise, trillions have been wiped off the value of pension plans across the world this year as markets plummeted. According to Bank of America, US pension funds alone have lost $1-2 trillion — and as a result, “find themselves under-funded and mostly unprepared to begin meeting the requirements of the PPA.”

The Act requires defined benefit pension schemes to be 100 per cent funded by 2011, with funding targets of 92 per cent this year, 94 per cent in 2009 and 96 per cent in 2010. If a company’s below the funding targets they’ll have to make cash contributions to their plans. And should a plan’s funding fall below 80 per cent (the “endangered level”), then the company must make a cash infusion to get to the 80 per cent mark or start cutting retiree benefits. If it falls below 60 per cent it can’t pay out at all. Harsh on retirees and company balance sheets, then.

On average, the top 100 pension funds have fallen from over 100 per cent funded to below 80 per cent, BoA says. Specifically, in December last year US pension plans covered 104 per cent of obligations — a $60bn surplus. Additionally, over half of the 100 largest US pension plans are expected to fall short of the required 2009 funding level, BoA says.

Bank of America’s Dennis Coleman and team have done the number-crunching (emphasis ours) on potential shortfalls:

We estimate that due to the PPA, many companies-including industry stalwarts Exxon Mobil, Johnson & Johnson, IBM (N/R), Proctor & Gamble (N/R) and DuPont-will soon need to begin funding underfunded pensions obligations.

The list of the top 10 companies reads like a who’s who of corporate America, highlighting the fact that this pension issue is widespread throughout the corporate world. However, while the numbers in absolute terms are large, the companies on average have more cash on hand than their possible funding liability of getting to 80%.

The list of Top 10 companies with potential pension shortfalls is below, with cash comparisons (click to enlarge):

We’d add that corporate plans are not the only ones experiencing the crunch in the States. New Jersey’s state pension fund lost something like $15bn since the start of its fiscal-year in July and California’s Public Employees’ Retirement System has dropped 11 per cent between June and September. In the US at least, public and private plans are in the same (sinking) boat.