S&P 500 pension plan funding to cost $57 billion over next two years

The cost of funding defined-benefit – company sponsored – pension plans at the top 500 listed companies in the United States will hit $24 billion this year and $33 billion in 2005, according to research by Credit Suisse First Boston (CSFB).

This compares with an estimated cost of $19 billion last year, $4 billion in 2002 and a pensions income of $7 billion in 2001. CSFB analysts said pension costs would continue to rise – despite rising equity markets – due to the “powerful smoothing mechanisms” developed into pension plan accounting.

CSFB, which assumed an 18% return on assets in 2003 and a 50 basis point cut in the discount rate last year, believes 236 companies will experience an increase in pension costs that will reduce their earnings this year. Of these, 27 companies will suffer a loss in earnings by more than 10 cents per share, including Delta Air Lines, Lockheed Martin, Boeing, NCR, Fedex, IBM, Goodyear Tire & Rubber, Aon, Unisys and Monsanto.

Company pension plans were hit by a ‘perfect storm’ of falling equity values and declining interest rates about two years ago. Despite active petitioning by investment bankers, few pension plans have adopted synthetic packages to smooth their asset and liability management mismatches. Equally few plans have switched out of equity investments.