A pension deficit refers to a condition when a pension fund has insufficient assets to meet its obligation. This term is also referred to as “underfunded pension.” A pension fund can have a deficit for many reasons—one of these reasons could be due to market downturns. Pension funds usually invest their assets to grow over time; if the market turns against them, the losses add up, causing severe hardships in gaining back the amount lost without taking more risk. When a pension fund has a deficit, it pays its current obligation from current income, rather than withdrawing it from assets grown over time.
As key stock indices continue to march towards new highs, there’s a wave of trouble brewing among big-cap companies regarding their pension deficits. While the mainstream focuses on a stock market propped up by low interest rates and money printing, few are talking about the big threat to corporate America known as the “pension deficit problem.”
According to Mercer, a pension consultant company, at the end of 2012, pension funds of S&P 500 companies had assets of $1.59 trillion and liabilities of $2.14 trillion—a pension deficit of more than $550 billion. (Source: Mercer, February 5, 2013.)
Some big-cap companies are showing concern and doing something about their pension deficit problems. For example, Ford Motor Company (NYSE/F) expects to spend $5.0 billion in 2013 to decrease its pension deficit—about the same amount Ford spent in 2012 on building plants, buying equipment, and developing new cars. (Source: “Low Rates Force Companies to Pour Cash Into Pensions,” Wall Street Journal February 3, 2013.)
Even with all the measures taken to control its pension deficit, Ford’s pension deficit increased to $18.7 billion at the end of 2012. Chief Financial Officer (CFO) Bob Shanks said, “It has got to be a problem for any large company that has a defined benefit plan.” (Source: Ibid.)
The Dow Chemical Company (NYSE/DOW), one of the big-cap companies on key stock indices, posted a loss of $716 million in the fourth quarter of 2012. The company’s CEO, Andrew Liveris, said the company is facing a “massive pension headwind” due to the change in the discount rate. The company expects that pension costs will go up to $250 million … Read More
Profit Confidential — IT'S FREE!
"A Golden Opportunity for Stock Market Investors"