US companies face 57% increase in pension funding, says report

The passing by the US Congress of the Pension Protection Act earlier this month, which was signed into law by President George Bush yesterday, could result in some companies having to contribute 57% more to their pension funds, according to a report published by Credit Suisse today.

The act, which is designed to attempt to fix problems in the pension system in the US, is more of a step in the right direction rather than a solution to all the difficulties for all parties involved in the pension system, according to Credit Suisse’s tax and accounting research team. Credit Suisse said pension-funding rules remain complicated and lack transparency. The Act also allows for a lengthy transition period, including two years of pension funding relief because the transition will begin in 2008. But Credit Suisse predicts the Pension Protection Act will affect companies' cashflows. Looking at the S&P 500, if the rules were fully phased in for 2006, then some companies in the S&P 500 would have to contribute $47 billion to their pension plans, which is 57% more than the £30 billion they are expecting to pay this year. A total of 102 companies could see their contributions more than double.Credit Suisse expects companies to respond by freezing more pension plans or borrowing more to fund their plans. For those plans that are in good shape, there might be a change in asset allocation to try and protect the plan’s funded status. And if interest rates were to go up enough then some companies might consider closing their pension plans.