“I don’t have to tell you,” said one of the auditors, “that the great stock market rise of the late 1990s created an unprecedented pot of gold for UCBS, and you tapped into it like never before. Now, the great stock market decline of the early 2000s has transformed your gold into lead, and it’s a dead weight that could sink this company’s earnings for years to come.
“In 2000,” he continued, “the market plunged, driving your pension fund assets into the hole, and we ignored it. The market plunged again in 2001, and we still ignored it. Now, as the market has continued to fall, we just cannot ignore it anymore. We have to start admitting these shortfalls. Yes, we can try to stretch it out over time, but if the market falls further . . .” His voice trailed off, hinting of dire consequences.
Johnston could think of only one defense: that UCBS was just one of hundreds of companies that the stock market decline was impacting in the in same way. He also thought that maybe—just maybe—investors would not single out UCBS for sale. So for the next half hour the discussion turned to the broader pension fund crisis nationwide.
Among 500 U.S. companies surveyed by consulting firm Watson Wyatt, 87 percent said their pension funds were fully funded in early 2000. By early 2002, the number had fallen to 37 percent and that was before the S&P 500 Index fell by another 20 percent that year. The total shortfall, just among 234 companies in the S&P 500 that had defined benefit plans, was a whopping $78 billion. But even this large number was based on very optimistic assumptions about the markets and the economy.
General Motors, for example, had a net surplus in its pension fund of $4.5 billion in 1999, but flipped to a net deficit of $12.6 billion at year-end 2001. Ford went from a surplus of $8.2 billion in 1999 to a deficit of $2.4 billion. Delta Airlines had a small surplus in its pension fund of $148 million in 1999, but by 2001, it posted a deficit of $2.3 billion.
Almost invariably, when companies calculated the future growth of their pension fund portfolios, they deliberately skewed the underlying assumptions in three ways:
- They typically assumed the stock market would recover in the next calendar year, even if there was no evidence of such a recovery.
- They assumed a steadily growing economy, even if there wasa real possibility of another economic decline.
- They assumed high investment returns, even if actual current returns were far lower
They lived in a dream world from which no one bothered to wake them. But when the paper gains disappeared in a cloud of smoke, there was hell to pay. The sheer dimensions of the problem were mind-boggling: Two-thirds of the S&P 500 companies reporting pension data were in the red. Of those companies, 13 owed their employees’ pension funds more than $1 billion each—General Motors ($12.7 billion), Exxon ($7.2 billion), Ford ($2.5 billion), Delphi ($2.4 billion), Delta Airlines ($2.4 billion), United Technologies ($2.3 billion), AMR ($1.9 billion), Pfizer ($1.3 billion), and Procter & Gamble ($1.1 billion); 4 owed $1 billion each—Chevron Texaco, Pharmacia, Goodyear, and Raytheon; and 32 owed more than a half billion each. More than 100 companies were short by $100 million or more.
Read More : The Pension Scam Unravels
