Private sector pensions of the S&P’s index of the 1,500 largest private companies are underfunded by over $400 billion. The deficits have resulted entirely during the financial crisis of 2008, according to an analysis in the Washington Post.
Ballooning pension deficits will leave some companies with diminished profits, weaker credit ratings and higher borrowing costs, which can translate into lower stock prices, Mercer principal Adrian Hartshorn said. The need to cover pension shortfalls could prompt businesses to reduce spending on items as varied as equipment that boosts productivity and dividends that deliver income for shareholders.
Though shoring up pension funds is supposed to increase employees’ financial security, it could involve such tradeoffs as reductions in wages, benefits and jobs, said Mark J. Warshawsky, director of retirement research at Watson Wyatt Worldwide, another consulting firm.
In a further irony, it could also prompt companies to freeze the amount of pension benefits employees can accrue, Warshawsky said.
In a related item, the Wall Street Journal reports that 401(k)’s have taken a massive hit just as Baby Boomers are gearing up to retire:
About 50 million Americans have 401(k) plans, which have $2.5 trillion in total assets, estimates the Employee Benefit Research Institute in Washington. In the 12 months following the stock market’s peak in October 2007, more than $1 trillion worth of stock value held in 401(k)s and other “defined-contribution” plans was wiped out, according to the Boston College research center. If individual retirement accounts, which consist largely of money rolled over from 401(k)s, are taken into account, about $2 trillion of stock value evaporated.
The losses are hitting as baby boomers, the first generation to rely heavily on such plans, are beginning to retire. Workers age 55 to 64 who have been in their current plans for 20 years or more saw their 401(k) account balances, on average, drop roughly 20% last year, according to the Employee Benefit Research Institute. Since those figures include new cash contributions to the plans, they understate investment losses.