Pension Problem News

The corporate pension problem that I’ve been writing about is starting to reach the mainstream press. Today’s San Jose Mercury News has a story about the problem.

What’s going on is that companies are underfunding their pension plans, and as the article says, this is an “accounting time bomb”. When stocks were rising the holdings of pension funds were sufficient to pay upcoming pensions without the companies contributing from revenue, so the companies were able to report higher profits. Now stocks are down so the will companies have to make up the difference. But they are allowed to estimate a return on their investments as part of calculating whether they have enough saved to pay for future retirees – and they are using unrealistic return estimates like 10%. Can YOU get 10% on your money these days? The companies are saying they can.

And even with those estimates they are going to have to come up with a ton of cash after this year ends, which will mean they will report lower profits, which will further depress the market, which will reduce the holdings of the funds, etc. From today’s story:

Countless investors could be surprised when Fortune 500 companies finally acknowledge problems. “Keep an eye out as we break past the end of the year,” warned Adrien LaBombarde, who helped write Milliman’s pension study. Pension problems “will be 10 times bigger at the end of the year, when the financial statements start showing this.”