The Pension Deficit Problem Threatening Corporate America No One Seems to Talk About

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 and $300 million this year. (Source: Ibid.)

Unfortunately, these are not the only big-cap companies suffering from pension deficit problems. Other companies like The Boeing Company (NYSE/BA) are deep underwater as well. In 2012, the company poured $1.6 billion into its pension funds. This year, it expects to spend another $1.5 billion. The company’s pension fund has a deficit of 26%.

Boeing’s misery has caused the company to release “core earnings,” which take out pension expenses from the earnings numbers. Boeing CFO, Greg Smith, said, “The continued decline in the pension discount rates, driven by the unprecedented low interest rate environment, has caused significant non-cash increase in our pension expense.” (Source: Ibid.)

While on one hand, the low interest rates and paper money printing caused the stock market to rise, on the other hand, it is causing big-cap companies big problems with their pension deficits. Keep in mind that a pension is an expense to a company. The longer interest rates stay low, the worse off pension funds of big-cap companies are going to be.

Where the Market Stands; Where it’s Headed:

After five years and trillions of dollars of newly created money, the Dow Jones Industrial Average hit a new high this week. The stock market has taken on a life of its own. As the economy deteriorates, the stock market rises. The very companies that are part of major stock indices like the S&P 500 will experience negative earnings growth this quarter—the second quarter this has happened in three quarters—and the market continues to rise. I continue to believe this rally is living on borrowed time.

What He Said:

“As for the stock market, it continues along its merry way oblivious to what is happening to homebuyers’ wealth. (Since 2005 I have been writing about how the real estate bust would be bigger than the boom.) In 1927, the real estate market crashed and the stock market, even back then, carried along its merry way for two more years until it eventually crashed. History has a way of repeating itself.” Michael Lombardi in Profit Confidential, November 21, 2007. A dire prediction that came true.