Five Years of Corporate Pension Plan Funding Gains Gone in Market Collapse

The top 100 U.S. corporate pension plans saw their funded status drop by nearly 30 percentage points in 2008, giving up all gains of the previous five years, according to a review of annual reports conducted by Pensions & Investments, a sister publication of Workforce Management.

The plans had an aggregate funding deficit of $198.9 billion in 2008, based on projected benefit obligations, a sharp reversal from surpluses of $111.1 billion in 2007 and $37.3 billion in 2006.

That’s the worst since 2002, when the top 100 plans had an aggregate deficit of $151 billion.

Gains of the previous five years were erased by plunging markets and declining corporate bond yields, with the average actual return on plan assets at -30.7 percent.

Only three plans saw positive actual returns, two of which—General Mills Corp. of Minneapolis and FedEx Corp. of Memphis, Tennessee—have fiscal years that ended last May, well before the market’s collapse. The third, Prudential Financial of Newark, New Jersey, had an actual return on plan assets of $334 million, or 3.4 percent of plan assets.

The average actual return on plan assets was 9.4 percent in 2007 and 11.7 percent in 2006.

The pension deficit, combined with pressures of the Pension Protection Act of 2006, means companies will have to ramp up pension contributions, according to Steven J. Foresti, managing director at Wilshire Associates in Santa Monica, California.

“A lot of corporations came into this environment with really solid balance sheets, so while it’s been a tough environment, I think many corporations were able to make sizable contributions.” Foresti said.

Company contributions rose slightly in 2008, to $19.1 billion from $17.3 billion in 2007. Three companies each contributed more than $1 billion to their plans last year: Bank of America Corp., Charlotte, North Carolina, at $1.4 billion; Raytheon Co., Waltham, Massachusetts, $1.2 billion; and Merck & Co. Inc., Whitehouse Station, New Jersey, $1.1 billion.

There’s also a danger that “the timing of the PPA and the timing of a horrendous market” will force more employers to freeze their defined-benefit plans, Foresti said. The number of Fortune 1,000 companies that sponsor one or more frozen defined-benefit plans increased to 169 in 2008, from 138 in 2007 and 113 in 2006, according to a Watson Wyatt Worldwide study.

On December 23, President George W. Bush signed the Worker, Retiree and Employer Recovery Act of 2008, a law easing some funding regulations put in place by the Pension Protection Act of 2006, such as the requirement of what interest rates plan sponsors must use to calculate pension liabilities.

Lobbying for relief
Despite the legislation, pension executives have been lobbying for further relief from PPA requirements. A proposal being considered by Democratic members of Congress would give additional breaks to active plans, provided they are not frozen for several years.

“You want to keep the system alive, and it’s delicate and the timing was such that it wasn’t in place very long before some tweaks were needed,” Foresti said.

“What companies have learned over the last two years is that they need retirement systems [that] are sustainable,” said Kevin Wagner, retirement practice director at Watson Wyatt Worldwide in Atlanta.

“A lot of companies are looking at their plans and making sure they make sense from a financial perspective and an HR perspective,” he added. Plan sponsors will be looking at long-term solutions that fit a wide variety of economic environments, Wagner said.

“The crisis we are clearly going to see is that people will not have sufficient assets to retire. It’s possible that companies will revisit this when people are ‘retired on the job,’ ” Wagner said.

“If you’re going to participate in risk-based investments, there is no avoiding this kind of situation,” Foresti said. “To find yourself at 81 percent funded when there have been two bear markets in the last decade, it kind of puts things in perspective.”

“Once the doctor tells you you’re going to die, and then you realize you’re not going to, you’re feeling pretty good,” Wagner said.

Of the 12 plans that were fully funded, the best-funded for the fourth year in a row was FPL Group of Juno Beach, Florida, with a funding ratio of 156 percent despite a return on plan assets of -34.9 percent. The plan’s funding ratio in 2007 was 216.5 percent.

The second-best was General Mills, with a funding ratio of 128.1 percent.

Rounding out the top five were MeadWestvaco Corp. of Glen Allen, Virginia, with a funded ratio of 126.4 percent in 2008, down from 152.2 percent in 2007; Prudential Financial at 120.1 percent, down from 126.5 percent; and Alcatel-Lucent at 115.3 percent, down from 132.9 percent.

The worst-funded pension plan was Atlanta-based Delta Air Lines Inc. This was the first year in which Delta assets were combined with assets of Northwest Airlines following the companies’ 2008 merger. Delta’s funding ratio in 2008 was 45.8 percent. In 2007, Delta’s funding ratio was 66.1 percent, while Northwest’s was 68.7 percent.

The Delta plan’s actual loss on plan assets was $1.1 billion, or 14.9 percent of the fair value of plan assets. In 2008, Delta contributed $125 million to its pension plan. It expects to contribute $275 million in 2009.

The next worst-funded pension plan belonged to Exxon Mobil Corp. of Irving, Texas. The plan’s funding ratio in 2008 was 50 percent, down from 88 percent in 2007. The actual return on plan assets was -47.2 percent. The company contributed $52 million to its U.S. defined-benefit plan in 2008 and expects to contribute $3 billion in 2009.

Houston-based ConocoPhillips saw its funding ratio fall to 51.4 percent in 2008, down from 73.3 percent in 2007. The plan’s actual return on plan assets was -35.4 percent and the company contributed $407 million to its U.S. pension plan in 2008. The company intends to contribute $930 million to the plan in 2009.

Delphi Corp. of Troy, Michigan, had a funding ratio of 53.9 percent in 2008, down from 76.5 percent in 2007. The plan had the worst actual return on plan assets on a percentage basis of the top 100 plans, with a loss of $3.2 billion, or 51.3 percent of the fair value of plan assets.

Delphi reported an allocation of 55 percent equities, 20 percent fixed income, 8 percent private equity, 11 percent real estate and 6 percent other for its U.S. pension plan in 2008 in its 10-K.

Rounding out the bottom five was Philadelphia-based Cigna Corp. at 54.8 percent, down from 84.5 percent.

J.C. Penney Co. of Plano, Texas, saw the greatest change in funding ratio, with the ratio falling 61.9 percentage points to 92.6 percent in 2008 from 154.5 percent in 2007. The actual loss on plan assets was $1.56 billion, or 45.2 percent of plan assets.

The average discount rate used to determine benefit obligations rose for the third year in a row to about 6.4 percent, from 6.26 percent in 2007. The average discount rate in 2006 was 5.86 percent.

Discount rates
Fifty of the top 100 plans increased their discount rates—20 of them by 50 basis points or more. Twenty-five plans kept the same discount rates.

The average long-term expected return on plan assets fell to 8.22 percent in 2008 from 8.41 percent in 2007. Only three plans raised their long-term expected return on plan assets.

A proposal by the Financial Accounting Standards Board amending Statement 132R was postponed by one year and will take effect December 15, 2009. The new amendment requires defined-benefit plans to release more information about their investment allocations.

In addition, there has yet to be further movement on Phase II of FAS 158, in which the board was expected to decide whether to measure liabilities using accumulated benefit obligations in place of the current measurement using projected benefit obligations.

Filed by Rob Kozlowski of Pensions & Investments, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.