Sep. 11, 2007 ( Investor's Business Daily delivered by Newstex) -- Say this much for financial crises: They never stop coming, and they never last forever. For proof, check out the U.
S. pension system. A few years ago it seemed headed for a crisis.
Plans sponsored by S P 500 firms were woefully underfunded. Many plans were either frozen or in default. Things got so bad that some experts said the pension system was in worse shape than Social Security.
There was talk that only a massive bailout would fix the problem. You don't hear that kind of talk anymore -- mainly because the crisis turned out to be not much of a crisis after all. A report released last month by Goldman Sachs (NYSE:GS) shows that defined benefit pension plans of S P 500 companies were, in aggregate, fully funded at the end of last year.
It was the first time in several years that S P 500 firms had enough money in the plans to cover their obligations. Gains Across The Board S P 500 plans were funded at a 101% level last year, up from 93% in 2005 and well above the 84% level reported in 2002. The plans had an excess of $8 billion in 2006.
That compares to an $83 billion deficit in 2005 and a $165 billion shortfall in 2002. Even companies considered poster children for shaky pension plans have bounced back. General Motors (NYSE:GM) GM was 119% funded at the end of last year, according to Goldman Sachs.
Boeing (NYSE:BA) BA was 101% funded. The report cited several reasons for the rebound: strong global equity markets, which raised the value of plan assets; rising long-term interest rates, which reduce the value of pension obligations; and robust corporate profits and cash flows, which have led many plan sponsors to boost contributions. It also helps that the S P 500 has been on a steady climb over the past five years.
Even after a recent dip the index has rallied 65% from its October 2002 bottom. "Good economic conditions in the U.S.
, combined with solid economic growth in many emerging (and) developing markets, have led to a favorable operating environment for many of the U.S. multinationals that comprise the S P 500," the Goldman report said.
The wild card is how recent economic and stock market turbulence will impact the pension system -- especially as the credit crunch tightens the purse strings at many corporations. Goldman Sachs analyst Michael Moran is upbeat that the system won't take a huge hit. "When you think about a lot of the things that drove the (pension system's) recovery, part of it was good asset performance.
We're still seeing that now," he said. "Most of the major indices are up this year, and earnings and cash flow remain strong. I don't think we're really that far off the mark from where we ended last year.
" Others are less certain. Howard Silverblatt, senior index analyst at Standard Poor's (NYSE:MHP) , said recent turbulence could have a profound impact on pension plans. His data show that pension plans at S P 500 firms were fully funded at the end of June.
But he expects the plans to be underfunded at the end of the current quarter as companies grapple with turbulent equity and credit markets. Beyond that, a lot depends on interest rates, Silverblatt said. "If rates change so much, the obligations on the pension plans also change so much," he said.
"The pensions have come a long way from 2002, but they'll still have the same difficulty if the markets start going down and the rates change." Deep Freeze? Some S P 500 firms that do remain fully funded likely will consider freezing their DB plans, experts say.
Under a freeze, the goal is to limit the growth of liabilities. In some cases, new employees are not admitted to plans. In other cases, existing employees cannot accrue additional benefits.
Union contracts prevent some companies from freezing their plans. But companies that can are doing so with greater frequency. A diverse group has announced freezes this year, including Hewlett-Packard (NYSE:HPQ) HPQ , Lincoln Financial Group (NYSE:LNC PR) (NYSE:LNC) LNC , Goodyear Tire Rubber (NYSE:GT) GT and Nasdaq NDAQ .
"The survey work and recent corporate actions seem to indicate that companies that can freeze plans may explore these options if they have not already done so," the Goldman Sachs report said.
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