Pension Funds -- the Next Shoe to Drop

Even with conservative estimates of the 2008 plan-asset returns, the $18.7 billion surplus becomes an $8.1 billion deficit and the stock market may not pick up the slack any time soon. For a company with cash flow problems, this is a terrifying obligation on the horizon.

Many major corporate pension funds were already underfunded as of year-end 2007. When the massive losses from this year are taken into account, the difference between obligations and assets could cause a funding crisis that may take down already weak companies. (Corporate funds are not required to disclose funding status until yearend.)

Macy's(M Quote), for example, has a plan that was only 70% funded, leaving it short by $980 million in 2007. Similar assumptions as those applied to GM leads to the underfunded amount jumping to $1.75 billion and the level of funding sinking to 46%.

If either of these funds were invested in any substantial way in the company's own stock, which is common in corporate plans, the losses could be substantially higher. GM shares have lost over 80% of their value this year, and Macy's is down 65.8%.

This problem is not confined to one industry. Relatively healthy companies have the same ax hanging over their heads.

ConocoPhillips(COP Quote) had underfunding of $1.14 billion at the end of 2007, leaving the plan only 73% funded, while Viacom(VIA.B Quote) is playing with fire, as it's able to fund only 58% of its obligation.

An underfunded pension fund erodes companies' bottom line. All private pension plans have to pay into a governmental organization, the Pension Benefit Guaranty Corp., or PBGC, which provides a form of insurance for employees covered by the plan. For a fully funded pension plan, the cost is nominal. Plans pay a premium of 0.9% on the amount underfunded. For a company whose deficit runs into the billions, it can be a crushing expense.