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NEW YORK: Proposed US reforms to encourage companies to fully fund their pension plans could potentially prompt ratings downgrades, according to Standard & Poor's, the ratings agency.
Underfunding of company pension plans has lessened since 2003 as the stock market has picked up, but the failure of a number of steel companies and airlines has increased the strain on the Pension Benefit Guaranty Corporation (PBGC) and led to growing calls for reform of the system.
Recently, the PBGC assumed responsibility for certain US Airways pension plans that are underfunded by an estimated $2.3bn. Later, it took on UAL plans, assuming $2.1bn of liabilities. Last year, the PBGC reported a record deficit of more than $23bn for single employer plans, from a $7.7bn surplus three years previously.
The PBGC has estimated that the single-employer plans it insures were underfunded by about $450bn, compared with $350bn in 2003. Of those companies rated below investment grade, and therefore more likely to run into trouble, plans were underfunded by $96bn, compared with $82bn.
Current proposals include raising significantly the premium companies pay to insure their schemes with the PBGC and changing accounting methods to mark assets more closely to market values instead of "smoothing" valuations to minimise portfolio volatility.
S&P analysts said they could not discount the possibility of ratings actions following reforms being passed, although they did not think it very likely under the current proposals. Cutting the flexibility of payment into the plans would make contributions more volatile and less predictable than they are currently.
"Clearly, companies would have a greater incentive to avoid funding deficits," said analyst Scott Sprinzen. "To the extent that if a company devoted more cash to plan contributions than anticipated, S&P would need to consider this in the context of the company's cash flow adequacy and other potential calls on cash."
The agency also said the proposals might encourage a further shift into bonds and out of more volatile equity markets. Longer-dated Treasury yields fell early this year, hitting 18-month lows at 4.36 per cent, on talk that pension funds were buying the paper in a bid to more closely match assets with liabilities. There is a shrinking pool of extremely longdated paper since the Treasury suspended issuance of 30-year bonds in 2001.
S&P added a caveat, however, that reforms might yet get caught behind other controversial reforms already on the government's agenda.
Lately however, Ann Combs, assistant labour secretary and head of the Employee Benefits Security Administration, maintained pension reform was a "high priority" for the Bush administration.
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