Get ready for something else to hit the fan: underfunded pension plans at newspaper companies. In general, this won’t have an immediate impact on cash flow, but it’s another looming liability for publishers, meaning their bankers won’t be buying them lunch, or writing loans for them, anytime soon.
Pension plan funding hasn’t been an issue for most companies in the last couple of decades, because most of the time the plan investments have done so well that required company contributions to pension plans have had little impact on cash flow. But pension plan funding becomes an issue particularly when (a) the market value of plan investments take a dive, as has happened during 2008, and (b) the size of the company shrinks, creating a situation similar to the Social Security problem: a shrinking pool of workers supporting a large pool of retirees. Newspaper publishers have both of those problems.
We’re talking here about defined-benefit plans — old fashioned pensions — not 401(k) defined-contribution plans. In a defined-benefit plan, employers fund an investment pool designed to pay benefits to retirees in proportion to their earnings and years of service. In theory, they make contributions every year to keep the value of the pool equal to the actuarially-determined present value of the benefit liabilities. In practice, permissible funding delays and market fluctuations can create underfunding situations. Many companies have frozen their defined-benefit plans, but even such plans can become underfunded in market declines. Typically, companies are required to make up underfunding caused by market declines over a seven-year period (so the market, itself, might help the fund catch up); underfunding due to other causes, like plan changes, must be remedied on a shorter timeline.
Pension funds are usually invested in a conservative mix of stocks and bonds. So, although the Dow Jones Industrials were off 38 percent for the year, a decently-balanced fund should be down just 20 percent or so. The basic rule is that plans with insufficient assets need to make up the difference over seven years; a gap at the end of 2008 needs to be funded starting in 2010. That doesn’t seem too onerous, but when the plan’s benefit obligation is measured in billions, a small shortfall has a real impact on cash flow. And if the next seven years turn out to be like the 1930s, the market might not help much.
Not all the year-end 2008 figures are available (or I haven’t tracked them down yet), but let’s look at some of the pension issues we know something about:...
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