Market-pounded pension funds to siphon profits

U.S. corporate pension funds are getting slammed by the stock market’s downturn, squeezing profits and prompting some employers to drop their pension plans or make other cuts to offset losses.

Defense giant Lockheed Martin Corp. recently cut its earnings forecast, citing higher pension costs; its retirement investments had dropped 25 percent this year. Boeing Co. estimated its pension fund was down 20 percent this year, likely forcing it to pump in $100 million more. And Raytheon Co., based in Waltham, Mass., said it plans to boost contributions to its pension fund by an extra $94 million next year, partly because the fund has shrunk 20 percent since January.

“We’re going to have a very bad year,” said Howard Silverblatt, an analyst with Standard & Poor’s, a financial research firm based in New York. “Companies are going to have to put significant amounts of money in [pension funds] this year.”

Silverblatt estimated that S&P 500 companies started the year with $63 billion more in pension assets than they needed to meet future payments. But after this year’s market debacle, Silverblatt said, they will probably end the year in worse shape than in 2002, when pensions were underfunded by $219 billion. Another research firm, Milliman Inc., predicted the 100 largest pension plans sponsored by public companies in the United States would end the year with a $40 billion deficit, even if stocks are flat during the fourth quarter. That compares with the $101 billion surplus the plans enjoyed in 2007.

To stem the losses, some companies have decided to drop or scale back their traditional pension plans, which guarantee workers a fixed retirement income, in favor of 401(k) plans, where employees manage their own investments and face the risk of market downturns.

According to a survey this month by the consulting firm Watson Wyatt, 11 percent of 248 companies said they have frozen or closed pension plans as a result of the financial crisis and another 4 percent plan to do so in the next year. Companies aren’t allowed to revoke pensions that employees and retirees have already earned, but can “freeze” or halt the accrual of additional benefits.

For instance, Equifax Inc., the Atlanta-based credit agency, said in September it will freeze its U.S. pension plan, affecting 4,000 employees. And The New York Times Co., which owns The Boston Globe, recently decided to scale back pension benefits for nonunion employees. Both companies vowed to beef up workers’ 401(k) benefits.

Many other companies have already shed their pension plans to save money and avoid the risk of stock market swings, but some people who track pensions said the trend could accelerate because of the stock market’s precipitous drop. In 2004, about 20.6 million workers participated in a traditional retirement plan, down from 30.1 million in 1980, according to the Employee Benefit Research Institute.

Karen Friedman, policy director for the Pension Rights Center, urged Congress to step in immediately to help preserve employees’ pensions, just as it rushed to pass a $700 billion plan to bail out financial institutions. Specifically, Friedman said Congress could give companies more time to fully fund their pensions and it could also consider changing pension rules to allow companies to offer different plans that might be easier to fund.

In the meantime, many companies are stepping up funding of their pension plans to offset investment losses.

Raytheon, for instance, plans to contribute $612 million next year to its pension fund, up from $518 million this year, partly because of the dive in the stock market. But the defense contractor said its fund is still on track to being fully funded by 2018.

“Raytheon is fully committed on every level to meeting any and all obligations of the pension plan in the foreseeable future,” said David C. Wajsgras, chief financial officer.

Some other companies with Massachusetts operations have pension funds that were significantly underfunded by the end of 2007, a situation probably made worse by the market decline this year. Among them are Boston Scientific Corp., Genzyme Corp., Intel Corp., Millipore Corp. and Interpublic Group of Companies Inc., according to data collected by Standard & Poor’s. But some of the firms said their retirement plans cover so few workers that they don’t expect any problems covering the losses.

“The bottom line is that companies are going to have to make cash infusions” into pension plans, said Silverblatt, the S&P analyst. “It’s going to hurt profits and cash flow.”