U.S. News

Funding Gap Doubles for US Corporate Pensions

By Dan McCrum and Nicole Bullock,

The funding gap for US corporate pension plans almost doubled in 2011 as bond yields dropped and stock market performancefailed to keep up with rising liabilities, to leave a far greater hole than at the height of the financial crisis.

Laurence Dutton | Getty Images

From a moderate surplus at the end of 2007, pension plan assets at S&P 500 companies now cover only about 74 per cent of estimated liabilities, calculates Credit Suisse, a deficit of roughly $450bn.

At the start of the year the S&P 500 pension funding gap was estimated at $250bn, according to Credit Suisse.

Falling interest rates, or yields , have also lowered the discount rate used to calculate the value of promises to past and present employees.

Credit Suisse calculates that every 25 basis point fall in the discount rate equals a $45bn increase in liabilities.

The discount rates used by companies has fallen about three times that much this year.

David Zion, head of accounting and research for Credit Suisse said: “You need really good returns to offset that. The typical pension plan has generated slightly positive returns this year, you can’t say that’s good”.

Some companies will have to make greater pension contributions next year, unless the US government passes some form of pension funding relief.

Current rules require companies to contribute the amount of any funding shortfall, spread over seven years. However, after times of market stress, the authorities have previously given companies temporary relief from requirements to fund deficits.

New Retirement: Tracking Pension Funds

Bankers predict some companies will issue corporate bonds to help fund pensions, while borrowing rates are low for highly rated companies. Much higher contributions could hit some company earnings, although US companies have stockpiled cash since the financial crisis.

Brendan Hanley, a managing director in investment grade capital markets at BofA Merrill Lynch, said: “The number of companies that will have to consider pension funding is growing. The debt markets are an obvious funding option.”

For instance in December, Raytheon sold $1bn of bonds whose proceeds will be used for general corporate purposes including the defence contractor’s pension contributions.

The company said: “This is simply another element in our overall financial strategy and was performed recently to take advantage of favourable interest rate conditions”.