FIRMS STILL SICK ON PENSIONS / THE WALL STREET JOURNAL ( RECOMMENDED READING )

HEARD ON THE STREET

DECEMBER 20, 2009, 4:35 P.M. ET.

Firms still sick on pensions

By JOHN JANNARONE

The market rally has been a healing experience for many investors. But companies with battered pension funds may be feeling ill for some time.

About $400 billion in pension assets held by Standard & Poor's 500-stock index companies reporting on calendar years, or about 27% of assets, evaporated in last year's market crash, estimates David Zion of Credit Suisse Group. That created some big deficits on future obligations that companies need to cover starting in 2010. It is tempting to think the S&P 500's 22% run this year would have shored up some losses and reduced the amount companies needed to contribute to cover the deficits. Investors shouldn't get their hopes up.

First, the companies' pensions are starting from a shrunken asset base, limiting the amount they could rise in the rally. It is unlikely many pension managers managed bold enough to boost stock allocation to take advantage of the market rebound since March.

In fact, some pulled money out of the stock market before it began recovering. Northrop Grumman, for instance, held about half its pension assets in stocks in recent years. Sometime in 2008 it cut the target stock allocation to a minimum of 15% from 45%. So by the end of last year, the allocation had fallen to 22%.

Granted, Northrop appeared to scale back its stock exposure in time to avoid some of 2008's market declines, losing a modest 15% on its portfolio last year. Even so, its pension plan, which had finished 2007 with a surplus, ended last year with a $3.6 billion shortfall on its $22.1 billion of obligations.

Northrop won't comment on what its stock allocation is now. But unless it raised the target, Northrop mostly would have missed out on much of this year's rally. That would limit its ability to reduce its pension deficit.

At the other extreme, New York Times Co. has stuck with an aggressive allocation to stocks. Even after losing 31% on its pension portfolio in 2008, the Times had 70% of the assets in stocks going into 2009 and has since maintained a target-allocation range of 65% to 75%.

Even for companies that have earned handsome returns, deficits may not have narrowed much. Companies use corporate-bond yields as a discount rate to calculate the present value of future payments to pensioners. And corporate-bond yields are about 1% lower compared with a year ago, which translates to tens of billions of dollars in additional obligations.

As a result, the total pension deficit for calendar-year companies probably has narrowed only slightly in recent months, to $270 billion, from $298 billion at the start of the year, estimates Mr. Zion. By law, companies have to make contributions toward closing those deficits over a seven-year period. Barring a new bull market, investors should count on plenty of that cash coming out of companies' pockets.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved