Last December’s announcement by General Motors that it had closed its pension benefits gap was a major event in the debate over the unfunded pension liabilities of US corporations. If GM, with nearly 2.5 retirees for each current worker, could climb out of an abyss that was roughly $20 billion at the start of 2003, couldn’t other companies do so?
They can, but not by depending solely on revised guidelines for calculating those liabilities or on the equity markets. Instead, corporations should consider undertaking two difficult tasks: increasing the level of contributions to the pension funds and improving their performance. For many com-panies, the sums involved are huge. Senior executives should therefore weigh the strategic trade-offs in timetables for paying down pension shortfalls in the same demanding way they now consider the implications—for earnings, balance sheets, and the capital markets—of building a new factory, entering a new territory, or acquiring a new competitor. Few companies take this approach today. Fortunately, as the economy emerges from its doldrums, more of them will have the resources to address their predicament.
The magnitude of the pension problem is epic: roughly 90 percent of all defined-benefit pension plans1 in the United States...