Administration December 9, 2003

Analyst Warns of IBM Pension Pounding

September 24, 2002 (PLANSPONSOR.com) - Without a turnaround in the markets, IBM may soon have to dig up $2 billion to $2.3 billion to pour into its pension plan, a Morgan Stanley analyst warned.

Reported by

Fred Schneyer

Morgan Stanley’s Rebecca Runkle said the plan’s funding status could drop as low as 80% to 75% by the end of next year.

Coming up with a multi-billion dollar cash pot would also effectively do away with IBM’s total cash and cash equivalents and cut into earnings, according to a Dow Jones news report.

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Runkle estimated that every 50-basis-point decline in IBM’s return on pension plan assets equals a $0.14 to $0.15-cent impact on earnings, Dow Jones said.

Option Impacts

Not only is the giant computer maker facing pension woes, but Runkle also warned that the effect of its stock option expense could be significant. Stock option expense accounted for 15% of earnings in 2001 and the number is potentially growing, she said.

“While the issue remains debatable, we believe that overall compensation levels should be considered when analyzing a company,” Runkle wrote, according to the Dow Jones report.

With often giant option grants given to executives of many of the failed and now bankrupt US corporations in recent years, many companies have voluntarily moved to expensing the options on their financial statements. Others may be forced into doing so by pending rules changes.

Auto Impacts

Meanwhile, other major corporations were grappling with their share of pension fund issues. For example, this summer, Ford officials said they didn’t anticipate having to pour more cash into their pension plan through 2006 absent a change in investment return, a change in certain actuarial assumptions, and no change in benefit levels. (See Ford Says Pension Gap Shouldn’t Require New Funds ).

A few weeks later, General Motors Treasurer Eric Feldstein admitted the GM’s pension plan has a large unfunded liability, but contended the investors shouldn’t be overly concerned about it.

The stock market’s recent travails have reportedly cost GM’s US pension fund 3% of its value this year, leaving the $67-billion pension plan which covers more than 630,000 active and retired US workers underfunded by some $9 billion. (See Pension No Problem: GM ).