S&P Equity Market Analysts Reports Pension Under-Funding At Historic High Despite Market Gains; New Reporting Requirements By FASB To Offer Investors More Insight Into Pensions

Standard & Poor's, the independent financial research, ratings and indices leader, today announced research from its Investment Services division showing that pension funding continued to deteriorate through 2003 even given sharp market increases. Despite the first market gain since 1999, pension under-funding in the S&P 500 grew to a record $259 billion from $212 billion in 2002.

With the S&P 500 total return for 2003 expected to surpass the 25% mark, pension funds have boosted their assets by $112 billion to $1,063 billion from $951 billion at year-end 2002, but still fall below the 2001 year-end value of $1,089 billion. Pension obligations however have soared to a year-end projection of $1,323 billion, up $160 billion from the 2002 close of $1,163 billion. The result is a deepening of pension under-funding to the $259 billion level from $212 billion a year earlier.

Funding status to market value remained nearly unchanged at -2.58% from -2.62% in 2002. By contrast, in 1999 S&P 500 funds were over-funded, with the surplus representing 2.30% of total market value. 2003 under-funding represents 60% of 2003 GAAP earnings-per-share. "Despite the short-fall, companies on aggregate have sufficient proceeds, both on hand and via the capital markets, to meet current pension obligations, but the current situation is an investor concern," said Howard Silverblatt, equity market analyst, Standard & Poor's. "Investors need to assess the full obligations of a company, where the required funds will come from and how any shift in expenditures will affect future growth," Silverblatt added. "This year many companies will post a pension loss due to the accounting smoothing effect, when they actually had a gain. This will muddy the actual pension situation."

Starting with this year's annual reports, investors will get some additional information from a new Financial Accounting Standards Board (FASB) rule that requires companies to disclose asset allocations, investment strategies, and contributions. Starting next June, companies will also have to report future benefit payments. "Investors need to familiarize themselves with these values and tables, and understand what these figures mean for company growth," Silverblatt said.

Noting that Congress adjourned this year without passing any pension legislation, Silverblatt said, "Looking forward to 2004, with predicted total returns of 12% for the S&P 500, and current interest levels expected to head slightly upward, 2004 funding should improve, but pensions will continue to remain under-funded for next year." Congress will again address the issue when it returns in January. Pending pension calculation changes would adjust the funding levels as well as the discount methodology, but would not affect benefits.

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