Record-Breaking Pension Underfunding Expected

(Reuters) – The funding status of U.S. pensions has been “devastated” by sharp declines in the stock market this year and U.S. pensions are expected to register record underfunding levels for 2008, Standard & Poor’s said on Tuesday.

Standard & Poor’s analyst Howard Silverblatt expects pension funds of companies in the benchmark S&P 500 index .SPX to be underfunded by $257 billion in aggregate this year, beating the previous underfunding record of $219 billion set in 2002.

By contrast, S&P 500 pension plans were overfunded by $63.4 billion in 2007, S&P said.

“Any pension fund manager that came remotely close to breaking even in 2008 is quietly celebrating that they survived one of the worst markets in the modern era,” said Silverblatt.

The Standard & Poor’s 500 index has dropped about 40 percent this year.

At the end of last year, pension plans of S&P 500 companies had 61 percent of their money in stocks, 28 percent in fixed income, 4 percent in real estate and 7 percent in other categories, according to Silverblatt.

S&P noted that under U.S. accounting rules, companies typically smooth their pension funding status by averaging historical returns over several years, which actually reduces reported losses.

In the past few months, U.S. businesses have pressured the U.S. Congress for relief on 2006 requirements to fully fund their pension obligations.

Earlier this month, the U.S. Senate approved legislation allowing generally healthy multi-employer pension plans hurt by the decline in the stock market to avoid having to make drastic pension plan contribution increases to fund their plans. (Reporting by Emily Chasan; editing by Jeffrey Benkoe)