Retirement Blues: Financial Crisis Pulls Billions From Pension Plans, Crimping Consumers' Dreams and Corporate Profits.

[This is the first installment of a two-story package that examines how the global financial crisis has put the squeeze on retirement funds. Tomorrow (Friday) Money Morning looks at strategies investors can use to bounce back from a big drop in the value of their 401(k) retirement plans.]

By Mike Caggeso
Associate Editor
Money Morning

Last year was a bad one for pension plans worldwide, with the global financial crisis vacuuming an aggregate $5 trillion from company-operated retirement plans in such key markets as the United States, Japan the United Kingdom and The Netherlands.

The plunge in stock prices knocked worldwide pension assets down from $25 trillion to $20 trillion, an excruciating decline of 19%, Reuters reported.

Only Germany, which was protected by a high allocation to bonds, saw its pension assets increase in value.

U.S. pension plans – which account for 61% of global pension assets – were especially hardhit. In a year in which U.S. stock market declines eradicated $7 trillion in shareholder wealth – equal to the total stock-market gains of the prior six years – company-sponsored pension funds found themselves under-funded to the tune of $409 billion at the end of 2008, while U.S. retirement accounts were lighter by $2 trillion.

That’s a life-changing loss, forcing many soon-to-be retirees to adjust their plans at least for the foreseeable future – or to scrap them altogether. American workers are postponing long-dreamed-of plans for their Golden Years, opting to work longer than they planned, taking second jobs, downsizing the lifestyles they’ve enjoyed for decades, or even all of the above.

As headlines from around the world remind us, this global retirement strategy is more than just government reports or statistics -- this crisis has a very human face.

Just consider how these retirement-fund losses are personally affecting people who had been counting on income from those vanished funds:

Pension Losses Will Have Widespread Fallout

The pension-fund losses will hit home on many levels.

For individuals, lost retirement funds are especially painful – especially for consumers who have watched the value of their home plummet, and for others who have seen one or more persons in the household lose their jobs.

The pension-fund declines could also end up crimping corporate earnings.

In the United States, company-sponsored pension funds are gradually going the way of the dinosaur, and one day may be extinct. Companies prefer to push the cost and liability of saving for retirement off on their employees, and are gradually closing down the corporate pension funds that were once viewed as a key part of a worker’s benefits package – almost as important as salary and vacation.

For a number of years, companies have been shifting away from those age-old pension plans by instead offering so-called 401(k) plans, which allow workers to contribute portions of their pre-tax earnings toward retirement, and which sometimes even feature a company “match” on a portion of those contributions.

But conventional pension plans remain in place – a reality (and problem) that’s coming home to roost.

At the end of 2007, U.S. company-sponsored pension plans were funded to the tune of 104% – meaning they were actually carried a surplus of $60 billion, according to HR consultancy firm Mercer Inc.

But with the evisceration of the Dow Jones Industrial Average, Standard & Poor’s 500 Index and Nasdaq Composite Index – not to mention the ultra-low yields of government bonds brought on by the aggressive rate-cutting campaign by the U.S. Federal Reserve – the pension funds that were over-funded at the end of 2007 were dramatically under-funded at the end of 2008 – by a whopping $409 billion.

At the end of 2008, because of that one-year swing of $469 billion, U.S. pension funds were only 75% funded. According to Mercer, that means that pension expenses are likely to increase from $10 billion in 2008 to $70 billion in 2009 as companies are forced to inject new money to meet anticipated retirement obligations.

That added expense will reduce profits.

“To put this into context, net income for [Standard & Poor’s] 1500 companies in 2007 (the last year the full information is available) was $727 billion, so an increase in pension expense of $60 billion would equate to an 8% reduction in profits,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement portfolios.

After stock prices plummeted last year and again early this year, companies have responded with cost-cutting measures that are both deep and wide. Companies are faced with two choices: Take cash out of the business or reduce the money that’s being pumped into their pension plans.

If they choose the latter, further pension purging could take the form of benefit restrictions and plan freezes, Mercer’s Hartshorn said.

Perhaps the best example is aerospace giant Lockheed Martin Corp. (LMT), which lowered its 2009 earnings forecast from a range of $7.65 to $7.90 per share to one of $7.05 to $7.25 because of rising pension costs.

“Although we, along with many others, thought that pension was likely to be painful in 2009, this is twice the adjusted expense that we were projecting,” Rob Stallard, a New York-based analyst with Macquarie Research Equities, wrote in a report, Bloomberg News reported. “Baking the pension issue into the stock should allow investors to return their focus to defense policy, spending programs and execution.”

Lockheed is by no means alone. The Pension Rights Center, a U.S. consumer organization dedicated solely to protecting and promoting the retirement security of American workers, retirees and their families, compiled a list of more than 75 companies that have recently changed their pension plans.

Relief on the Way?

Still, amid all the financial chaos last year, there was enough lobbying power to bring the pension crisis to the attention of Congress.

And one of President Bush’s final actions was signing the Worker, Retiree, and Employer Recovery Act of 2008, which hopes to cut back on the number of employers reducing pension benefits, especially as stock markets crumble.

Provisions of the bill include:

  • Aid for single-employer pension plans.
  • Relief for multi-employer plans.
  • And temporary penalty suspensions for individuals 70½ and older who do not make required distributions from their Individual Retirement Accounts (IRAs) and 401(k)-style plans in 2009.

Retirees who don’t withdraw the minimum from their retirement account – an amount based on their account’s balance last year – would normally face a 50% tax penalty.

“By making minimum withdrawals from retirement savings accounts optional rather than mandatory for next year, older Americans are poised to hold on to more of their diminished nest eggs,” David Certner, AARP legislative policy director, said in a statement, MarketWatchreported. “By freezing the withdrawals for next year, every older American -- who was forced to make a choice between taking a withdrawal that was calculated based on a much higher value in their retirement account or face a high tax penalty – will be eligible for this financial relief.”

However help or recovery arrives, it will likely to do little to stop employers from trending away from offering pension funds to their employees.

More than 60% of workers with retirement coverage in 1983 had only a traditional pension. Today, that figure is 20%, because employers shifted to 401(k)s – a move that also shifted risks and responsibilities to employees, The New York Times wrote.

[Editor's Note: Uncertainty will continue to be the watchword for at least the first part of the New Year. Little wonder, as the global financial crisis continues to whipsaw the U.S. financial markets in a manner that hasn't been seen since the Great Depression. It's almost enough to make you surrender and give up the investment game forever.

But what if you knew – ahead of time – what marketplace changes to expect? Then you'd be in the driver's seat - right? You'd know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting - and finally profiting from - the very marketplace events you anticipated.

R. Shah Gilani - a retired hedge fund manager and a nationally known expert on the U.S. credit crisis - has predicted five key financial crisis "aftershocks" that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, Gilani uses these “trigger events," as gateways to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report.]

News and Related Story Links:

  • Charlotte Observer:
    State pension fund's value drops 22%
  • MSNBC:
    Police Union Could Sue City Over Pension
  • Pension Rights Center:
    Companies That Have Changed Their Defined Benefit Pension Plans