Mounting pension liabilities have become the latest bogeyman on Wall Street recently, and for good reason.

As the stock market has continued to sink lower, more and more companies have seen their pension surpluses from the late 1990s transformed into deficits, making it increasingly difficult for them to meet their obligations without making a large infusion of cash.

"The losses in 2001 wiped out the previous year's gains, so the cushion is gone," said John Ehrhardt, a principal and consulting actuary at Milliman USA.

Sweet and Sour

During the height of the bull market, investing pension assets in the stock market proved to be a successful strategy. As prices soared, gains from pension plans almost equated to another revenue stream. But as the market crumbled, many firms found themselves with less money in their coffers than was needed to pay their retirees.

Because federal law requires firms to keep their plans adequately funded, companies could be forced to shell out billions of dollars in the next few years, draining precious cash flow and lowering valuations even further.

According to a study by Salomon Smith Barney,

Procter & Gamble

(PG) - Get Report

,

ExxonMobil

(XOM) - Get Report

,

Mirant

( MIR),

Tupperware

(TUP) - Get Report

and

Amerisource

(ABC) - Get Report

are among the most seriously underfunded companies in the

S&P 500

based on a percentage of their obligations.

Worse still, these firms are also using aggressive pension assumptions in calculating their earnings, said Salomon. Accounting rules allow companies to book profits based on expected, rather than actual, returns on pension assets.

Meanwhile,

General Motors

(GM) - Get Report

,

Ford

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,

Delphi Corp.

( DPH),

DuPont

(DD) - Get Report

,

SBC Communications

( SBC) and

IBM

(IBM) - Get Report

, are the most underfunded on an absolute basis, according to a separate study by Merrill Lynch.

Acceleration

What is perhaps most disconcerting is the speed with which pension liabilities have grown recently. GM, for example, achieved full funding for the first time ever in 2000 but swung to a $9.1 billion deficit in just one year.

And the problem isn't limited to a handful of companies. In fact, of the 346 S&P 500 companies with defined benefit plans, 82% were underfunded by as much as $245 billion by the end of 2001, Merrill's study showed.

Excluding health care benefits, these firms had a surplus of just $1.1 billion -- down significantly from $215 billion in 2000.

Morgan Stanley's accounting consultant Trevor Harris said even if plan investments return 5% in 2002, companies in the S&P 500 will still be $40 billion short of their projected pension obligations. If plans lose 5%, the deficit will swell to $150 billion.

"Companies with limited cash resources are going to have to make some decisions; either they cut back

spending or they try to generate more cash," Ehrhardt said.

Still, he said that some firms could voluntarily make payments even when they aren't required to do so by law because raising the level of assets can also give earnings a boost.

For example, if a company is assuming a 10% return on assets, a $2 billion contribution will increase profits by as much as $200 million, he said. In addition, companies can take the contribution as a tax deduction.

While that may seem like a decent tradeoff, it also means that capital expenditures and corporate buybacks could be put on the backburner.

Among sectors, the consumer discretionary, consumer staples, industrial, health care and energy groups are the most heavily underfunded, but analysts say that technology and telecom stocks won't be afflicted nearly as much.

In fact, the telecom sector is the most overfunded sector in the S&P 500 because many companies in this group haven't been around long enough to develop large pension obligations. It's also worth noting that half the companies in the tech sector don't have defined benefit plans, where the employer is obliged to make set contributions. Instead, those companies offer employees a defined contribution plan like a 401(k).

"I don't think this is as big of a deal as people make it out to be," said Salomon's accounting analyst Phillip Gainey. "But I think the threat will become more serious for some companies if the markets don't turn around in the next couple of years."