Pension Funds -- the Next Shoe to Drop

As personal-savings accounts are starting to resemble piggy banks more so than treasure chests, pension income for workers lucky enough to have a defined benefit plan will become even dearer.

The problem is that every major pension fund, public and private, has been investing in the same risky assets that have crushed personal accounts and they, too, are now suffering losses that could lead to funding crises and, perhaps, government intervention.

Goldman Sachs' Global Markets Institute estimates that corporate defined benefit pension plans have fallen from being 108% funded at the end of 2007 to being 91% funded as of Oct. 13. This drop has led to a cumulative funding deficit of $115 billion. This means corporate defined benefit pension funds have lost $217 billion in 2008.

Pension funds are the biggest investors in the world. Calpers, the California Public Employees' Retirement System, had $253 billion in assets at the end of last year. By Sept. 30, assets had fallen to $213.5 billion, a loss of $39.5 billion, or 15.6%. And the numbers aren't even in for October, the worst month for equities.

Benefit Obligation Benefit at the beginning of the year 85,227 Interest, service, and other costs 6,246 Benefits paid (7,500) Benefit at year end 83,973     Plan Asset Assets at the beginning of the year 104,070 Return on plan assets (20,814) Benefits paid (7,500) Employer contributions 89 Assets at year end 75,845 Funded Status: (8,128)

The largest corporate fund is held by automaker General Motors(GM Quote). Weighing in at $104 billion in assets with obligations of $85.3 billion, it had a positive funding status of $18.7 billion as of Dec. 31, 2007. If we assume GM contributes and pays out similar amounts this year as it did in 2007 ($89 million in and $7.5 billion out, respectively) and we assume a return of minus 20%, which would beat the S&P 500, a rough sketch of the impending problem begins to unfold.