'Liability Losses'

While the S&P rallied 26.5% in 2009 and company debt gained 26%, boosting pension asset values, declining bond yields have increased the projected benefit obligations.

"Liability losses could dwarf even good investment gains," said John Ehrhardt, a principal and consulting actuary in New York with Milliman. "It's a cash flow issue, it's a drag on earnings when you look at the accounting numbers, and it's a hit to your balance sheet, which can cause all kinds of problems about loan covenants and everything else."

The assets of corporate pensions relative to their deficits, known as the funded ratio, fell to 70.1% in August, also the lowest in at least 10 years, from 75.6% the month before, according to the Milliman 100 Pension Funding Index. Pension plan assets declined $17 billion last month to $1.076 trillion, a loss of 1.12%. The median expected monthly return for plans in the index is 0.65 percent for 2010, a yearly return of 8.1 percent.

Pension Protection

The Pension Protection Act of 2006 requires companies to increase pension-fund assets gradually to put them on firmer financial footing, reducing the chances the government will have to take them over for failing. President Barack Obama signed pension relief legislation in June giving companies more time to meet the standards.

"Recently enacted pension relief will defer 'paying the pension piper' to some extent," Fitch analysts Mark Oline, John Culver and James Rizzo wrote in the Aug. 23 report. "Allowing issuers to defer funding can lead companies to dig even deeper holes that can result in putting both pensioners and bondholders at greater risk."

The U.S. central bank has kept its target overnight lending rate in a range of zero to 0.25% since December 2008 in a bid to spur the economy. The Fed's preferred gauge for the trend of inflation -- the core personal-consumption expenditures price index, minus food and energy -- rose at an annual rate of 1.4% in July, below the central bank's target for inflation of 1.7% to 2%.

"Companies will take a hard look at the 'conservative' fixed-income part of their portfolios as assets are rolled over into lower coupon bonds and further capital gains are no longer realistic," Fitch said in the report. "A deflationary environment would extend the period of low yields and the challenges of achieving adequate returns."

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