The bear market that began in 2000 focused attention on two issues – pensions and profits. The initial pension problem was the big decline in value of individual 401(k) accounts. The profit issue was misconduct and stock options. In fact, there is another compelling issue involving both pensions and profits – the impact of the bear market on defined benefit pension plans.

Plan sponsors have a projected benefit liability, which until recently was covered by the rise in asset values during the extended bull market. When stock values fell by 50 percent, sponsors for the first time in decades had to contribute to their pensions. But even without the decline in the stock market, sponsors of defined benefit plans were going to face increased pension contributions in the coming decade. The reason is a host of regulatory and legislative changes in the late 1980s that slowed or limited pension contributions.

Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm's contribution to its pension plan would have been 50 percent higher during the 1982–2001 period; corporate profits would have been roughly 5 percent lower.

The deferred contributions are coming due. The decline in the stock market and an ageing population imply that contributions would double from their current level. As the economy emerges from recession and the bear market draws to a close, firms and investors must be prepared to contend with a strong headwind from pension funding obligations that could slow the recover.