GLOBAL - Continued equity market weakness has wiped out the pension surplus of the S&P500.
For the first time since 1993, S&P 500 company pensions are in aggregate deficit, new research from UBS Warburg has shown.
General Motors, for example, has reported a US$22,225m deficit for the year to the end of August 2002.
UBS Warburg estimates that in 2002 S&P500 companies will report aggregate pension costs rather than income for the first time since 1998 and expects this swing in pensions to adversely affect 2002 EPS by US$0.95 and then an additional US$0.40 in 2003.
Companies may raise return on asset assumptions to help manage these pension charges, but current assumptions are already optimistic.
About 60% of S&P500 companies assume ROAs of 9-10%, and 20% are in excess of 10%. Since the early 1990s, the ROA and discount rate spread has nearly tripled.
In 2001 the aggregate pension surplus for S&P500 companies dropped to US$1.2bn, which was 0.1% of the aggregate pension benefit obligation or 0.01% of the S&P500 market cap.
The median pension plan had a deficit of 9% as of the end of 2001, the lowest median funding level since 1992.
In 1999, the net surplus was US$252bn or 2.3% of market cap, the highest level in over a decade.
UBS Warburg estimates the current net pension funding of S&P500 companies at a deficit of US$126bn or 11% of the current pension benefit obligation or 1.5% of aggregate S&P500 market cap.
If the S&P500 ends the year at 1050 and the MSCI at 1150, UBS Warburg estimates pensions funding will then be a US$72bn deficit or 6% of the estimated pension benefit obligation or 0.8% of S&P500 market cap.
The projected 2002 aggregate pension cost is US$5.4bn compared with net pension income of US$8.2bn in 2001.
Using UBS Warburg’s 2002 year-end pension funding estimate, the 2003 net pension cost will be US$11.2bn.
In Europe UBS Warburg calculates an aggregate pension fund deficit of E81bn (£51bn) among 63 companies within the Eurotop300 Index – more than half of their combined profit of E154bn.
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