Real Victim of Pension Underfunding Future Earnings, Says UBS

By Staff Report

May. 12, 2008

While almost half of the companies in the S&P 500 have underfunded pension plans, the shortfalls at Ford and Goodyear pose more of a threat to future profitability of those companies than is the case with any of the others in the index, according to a new report from UBS analysts.

David Bianco, a strategist in the investment research group at UBS, notes that a company’s funded status should be compared with its market capitalization to truly measure its effect on a balance sheet. That said, the pensions at Ford and Goodyear are underfunded by roughly $3.3 billion and $1.5 billion, respectively—or 22 percent of their market caps. This, according to UBS, ranks as the largest pension shortfall-to-market value ratio among S&P 500 companies.

“Any shortfall in pension funding will require a diversion of future corporate profits to the fund, and equity capitalization represents the market’s estimate of future profits,” Bianco noted. “Therefore, this ratio reveals the relative burden of the deficit.”

On the other end of the spectrum, the pensions at General Motors and Eastman Kodak are nicely overfunded, and they appear less likely to drag down earnings. GM is carrying a roughly $8.3 billion pension surplus, which represents an estimated 59 percent of its market cap, the highest of any company in the S&P. Eastman Kodak, meanwhile, has a $1.5 billion surplus, which registers as 24 percent of its market cap, second only to GM.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail

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