My first post was on IBM's decision to freeze its pension plan. Subsequently I posted on the GAO's study of pension plan underfunding. It is significantly frustrating for analysts to study companies, to spot dreamy thinking and have no ability to correct it.
Pension plan assumptions have been a leading concern, after stock options and management compensation agreements. Today's International Tribune Herald put it succinctly: "That 8 percent annual return on investment you and your pension fund manager were banking on is looking almost as optimistic as Bernard Madoff's magic 12 percent, as deleveraging and deflation bite."
The article quotes, "David Zion at Credit Suisse in New York estimates that the pension funds of the S&P 500 companies could be underfunded by $362 billion, a drop of $420 billion in the year. This is far worse than back in 2002, after the last stock market slump, and leaves 70 of the 500 with underfunding equivalent to more than 10 percent of their market cap."
Based on earlier studies, I think this number is optimistic and could well exceed $500 million. If forced, these companies will be forced to take a hit to earnings to more fully fund. However, I believe that companies will find a way to do as IBM has - to freeze benefits and reconfigure employee commitments to a lower level.
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