Whatever the Time Frame, Funded Status Is Lousy
For 2008, the 100 largest U.S. corporate pension plans saw their funded status fall by 30 percentage points, dropping to 79 percent funded as of December 31 from 109 percent at the end of 2007, according to an analysis by Watson Wyatt Worldwide of Arlington, Virginia.
That’s based on cumulative assets of $798.9 billion and liabilities of $1.017 trillion at the end of 2008, compared with $1.078 trillion in assets and $992 billion in liabilities a year earlier.
Recent information isn’t any better.
For February, Milliman Inc. reported a funded status of 71.7 percent for the top 100 plans; Mercer, 74 percent for plans in the S&P 1,500; BNY Mellon Asset Management, 67.7 percent for its typical pension plan; and Towers Perrin, 60.2 percent for its benchmark plan.
Last year, according to Watson Wyatt, the plans lost $303 billion in assets as funding levels fell to a $217 billion deficit from an $86 billion surplus at the end of 2007. Assets of the 100 largest plans declined 26 percent to $799 billion as of December 31.
Only 14 percent of plans had funding levels greater than 90 percent at the end of last year; a year earlier, four-fifths of the plans were more than 90 percent funded.
According to Watson Wyatt, high allocations to equities were the culprit for plans that lost the most assets in 2008, an average 32.3 percent decline for those with at least 90 percent of assets invested in stocks.
Plans with less than 20 percent in equities lost an average of 6 percent.
“There’s more and more of a realization that equities have a lot of inherent risk,” said David Speier, senior retirement consultant at Watson Wyatt. “Those that had a majority in bonds are the lucky ones.”
Only 2 percent of plans invested less than 20 percent in equities and only 1 percent invested more than 90 percent.
Two-thirds of the plans allocated between 55 and 74.9 percent of assets to equities. Among those plans, returns ranged from -23.64 to -28.04 percent.
Pension funds that adopted liability-driven investing strategies did better for the year because those strategies use bond and derivative markets to better hedge their long-term pension liabilities, Speier said.
Watson Wyatt analyzed pension disclosures in plan sponsors’ 10-K filings with the Securities and Exchange Commission, looking specifically at the largest pension plans among publicly traded companies with year-end 2008 fiscal data.
For the 83 companies that provided asset allocation information in their filings, equity targets for 2009 were similar to 2008’s, but the actual allocations to equities declined because of the declining stock market. Actual equity allocations fell to 48 percent at the end of 2008, down from 59 percent a year earlier.
The companies plan to contribute a total of more than $27.7 billion in cash to their defined-benefit plans this year, up 50 percent from $18.4 billion they contributed in 2008, the analysis found.
“Plan sponsors were hit hard with a double whammy in 2008 with severe market declines and new funding rules coming into effect,” Speier said. “This combination will require employers to make staggering pension contributions over the next couple of years, at a time when they can least afford them.”
Seattle-based Milliman Inc. said the 100 largest U.S. corporate defined-benefit plans lost $54 billion in assets in February and $102.7 billion since the end of 2008. Funded status declined to 71.7 percent at the end of February, from 74.9 percent at the end of January and 77.2 percent at year-end 2008, according to the Milliman 100 Pension Funding Index.
The losses were offset slightly by liability decreases of roughly $21 billion, resulting in a net loss of $33 billion for the month.
Assets fell to $869 billion at the end of February, down from $923 billion at the end of January and $972 billion from year-end 2008. Pension liabilities went to $1.212 trillion at the end of February, from $1.233 trillion at the end of January and $1.259 trillion from year-end 2008.
“I’m glad February is behind us,” John Ehrhardt, principal, consulting actuary and co-author of the Milliman index, said in a telephone interview. “I hope the worst is behind us, but the hole we’ve dug in January and February is going to be tough to pull out of.”
Even if asset values and contributions went up over the rest of year, companies are still probably looking at a net decrease in their pension plans’ funded status in 2009, and that change is going to hit the companies’ balance sheets because their cash contribution requirements will go up, he added.
Reports from Mercer LLC, New York; Towers Perrin of Stamford, Connecticut; and BNY Mellon Asset Management in New York suggest further declines in funded status in 2009.
In Mercer’s study, the funded status of S&P 1,500 companies’ defined-benefit plans was an estimated 74 percent as of February 28, down slightly from 75 percent at the end of January. The Mercer analysis found an aggregate estimated deficit of $373 billion, just below the $380 billion as of January 31 and the $409 billion at the end of 2008.
Meanwhile, a hypothetical benchmark pension plan tracked by Towers Perrin suffered a 3.9 percentage point decline in its funded ratio in February to 60.2 percent, the lowest level since the firm created the benchmark in 1990.
The benchmark plan’s portfolio is 60 percent equities and 40 percent fixed income. The plan’s equity portfolio has returned a cumulative -43 percent since September.
“Pension funds are going through the same down period as everyone else who participates in the capital markets,” Jerry Mingione, principal at Towers Perrin, said in a telephone interview. “The timing and extent of the drop-off is of course coming as quite a shock to investors and financial managers.”
The BNY Mellon Pension Liability Index showed that the typical U.S. pension plan dropped six percentage points in February to 67.7 percent funded. New York-based BNY Mellon defines the typical plan as having a moderate-risk portfolio consisting of: 50 percent Russell 3,000 Index equities; 10 percent Morgan Stanley Capital International Europe, Australasia and Far East Index equities; and 40 percent Barclays Capital U.S. Aggregate Index bonds.
Mingione said that given the turbulence, disparate results on funding status are possible.
“The bond markets are so disparate in terms of the yield curves,” Mingione said. “You can get very different results depending on the bonds you let in.”