- NEW YORK (Reuters) - Stocks
slumping for the third straight year will leave large portions of the pension
funds of hundreds of top U.S. companies underfunded at the end of 2002,
investment bank Merrill Lynch & Co. (NYSE:<http://finance.yahoo.com/q?s=mer&d=t>
- MER - <http://biz.yahoo.com/n/m/mer.html>News)
said.
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- These companies, which include General Motors Corp. (NYSE:<http://finance.yahoo.com/q?s=gm&d=t>GM
-
- <http://biz.yahoo.com/n/g/gm.html>News) and some
other big names in the broad Standard & Poor's 500 index (CBOE:<http://finance.yahoo.com/q?s=%5espx&d=t>
- ^SPX - <http://biz.yahoo.com/n/_/_spx.html>News)
, will take a hit to their 2003 cash flow and earnings as they will be
forced to contribute billions of dollars to their pension plans -- waylaid
by the stock market's spectacular decline since 2000 -- to comply with
U.S. laws that protect employee retirement funds.
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- Merrill Lynch estimates that the traditional pension
funds, also known as defined benefit plans, for 98 percent of 346 S&P
500 companies are expected to be underfunded at the end of 2002. Those
companies make up 70 percent of the S&P 500.
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- On aggregate, the pension funds of these 346 companies
are expected to be underfunded by $640 billion -- or 69 percent of the
total assets in their pension plans, according to a Merrill Lynch analyst's
study.
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- Excluding post-retirement funds, pension funds are underfunded
by $323 billion at the companies, a sharp drop from an overfunded position
of $0.5 billion at the end of 2001, the investment bank said.
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- At the end of 2000, the reverse was true: The funds were
overfunded by $215 billion.
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- So far this year, the S&P 500 has fallen 28 percent.
It has tumbled about 46 percent from its all-time high reached in March
2000. Among the stock slide's biggest victims were pension funds, which
typically invest a large portion of their cash in stocks.
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- A BRUTAL REALITY CHECK
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- Even as the U.S. stock market suffers its third straight
year of heavy losses, S&P 500 companies currently still assume that
their long-term returns on pension fund investments will be 9.3 percent,
according to Adrian Redlich, director of Merrill Lynch's global analytic
and thematic research.
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- The expected returns on plan assets, however, will likely
fall to between 8 percent and 8.5 percent, Redlich said.
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- "Indicatively, these changes could lead companies
and analysts to downgrade earnings, over the coming six months, by 5 to
10 percent," Redlich wrote in a research note.
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- Cash flow and earnings in large companies, especially
major industrial manufacturers with big labor forces and huge pension plans,
will be hurt the most by pension issues, according to Standard & Poor's
Corp., a financial services and information company owned by The McGraw-Hill
Cos. (NYSE:<http://finance.yahoo.com/q?s=mhp&d=t>MHP - <http://biz.yahoo.com/n/m/mhp.html>News)
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- Among the most underfunded companies in absolute terms
for pension and post-retirement plans are GM and Ford Motor Co.(NYSE:<http://finance.yahoo.com/q?s=f&d=t>F
- <http://biz.yahoo.com/n/f/f.html>News), the world's top automakers;
International Business Machines Corp. (NYSE:<http://finance.yahoo.com/q?s=ibm&d=t>IBM
- <http://biz.yahoo.com/n/i/ibm.html>News), the world's largest supplier
of computers and computer services; SBC Communications Inc. (NYSE:<http://finance.yahoo.com/q?s=sbc&d=t>SBC
- <http://biz.yahoo.com/n/s/sbc.html>News), the No. 2 U.S. local
phone company, and The Boeing Co. (NYSE:<http://finance.yahoo.com/q?s=ba&d=t>BA
- <http://biz.yahoo.com/n/b/ba.html>News), the world's largest maker
of commercial jets.
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- Merrill's estimates are based on the assumption that
the actual return on plan assets will be a negative 10 percent this year,
and that company contributions and benefits paid this year are in line
with 2001 payouts.
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