The top 100 U.S. corporate pension plans in aggregate were overfunded for the second year in a row, according to Pensions & Investments' review of annual reports.
The plans had an aggregate funding surplus of $111.1 billion in 2007, based on projected benefit obligations, up from $37.3 billion in 2006. In 2005, the 100 plans were underfunded by $50.6 billion; in 2004, they were underfunded by $69.5 billion.
Of the top 100 plans, 64 had funding surpluses at the end of 2007, a 42.2% increase from 2006.
At the height of the corporate pension funding crisis in 2002 — when the top 100 plans were underfunded by an aggregate $151 billion — there were only 14 plans with funded ratios over 100%.
The increase in corporate plan funding is attributable to several factors, according to Steven J. Foresti, managing director at Wilshire Associates, Santa Monica, Calif.
“One would be a slight fall in rates, which would (cause) the measurement of liabilities to fall slightly. Remember that most corporations have fiscal years ending in December, and (at) that time (December 2007) the market was doing OK. Asset returns were healthy.”
He also cited the Pension Protection Act of 2006 which, “from a contribution standpoint, would inspire companies that are below the 100% line to be a little more aggressive,” Mr. Foresti said.
Indeed, 18 plans in the P&I survey became overfunded last year. Of those, 14 were among those receiving the largest employer contributions.
“The best way to think about it is a schedule of asset growth,” Mr. Foresti said. “There's a well-funded plan that on average is 100% funded, is underfunded half the time and overfunded half the time. In that respect, think of 100% funded as being on a schedule. And a plan that's above 100% is ahead of that schedule. It doesn't mean that they're not going to have to contribute. It doesn't mean that the plan is free. It means the timing of those contributions becomes more voluntary. The more that's put aside to date just provides additional flexibility in terms of contribution policy in the future.”
The best-funded plan was FPL Group, Juno Beach, Fla., with a funding ratio of 216.5%, up from 200.1% in 2006. This is the third year in a row that FPL headed the list of best-funded plans.
Bank of New York Mellon (BK), New York, had the second-best funding ratio, with 159.3%. This was the first time that the Bank of New York Corp. and Mellon Financial Corp. reported combined assets; their merger was completed July 10. The combined assets also brought the new firm into the top 100 list for the first time. The funding ratio for Bank of New York was 164.4% in 2006.
Rounding out the top five best-funded plans were J.C. Penney Co. Inc., Plano, Texas, with a funded ratio of 154.5% in 2007, up from 124.3% in 2006; Wachovia Corp., Charlotte, N.C., at 153.5%, up from 126%; and MeadWestvaco Corp., Glen Allen, Va., at 152.2%, up from 137.7%.
J.C. Penney and Wachovia contributed $300 million and $270 million, respectively, to their pension plans.
Discount rate rises
The average discount rate used to determine benefit obligations rose for the second year in a row, leading to better funded ratios, while contributions and returns went down in 2007.
The average discount rate was 6.26% in 2007, up a full 40 basis points from 5.86% in 2006. Ninety-one of the top 100 corporate pension plans raised the discount rates used to determine benefit obligations; 49 plans raised their discount rates by 50 basis points or more.
The average percentage return on plan assets fell in 2007, to 9.4% from 11.7% in 2006, although no plans reported a negative return.
Eastman Kodak Co., Rochester, N.Y., had the greatest actual return on plan assets, at 17.3%, up from 14.8% in 2006. Its expected long-term rate of return was 9% in 2007 and 2006. Electronic Data Systems, Plano, Texas, had the second-highest return, at 16.3% in 2007, up from 15% in 2006. Delta Air Lines Inc., Atlanta, had the third-highest, at 16.2%.
Despite the lower overall average return in 2007, eight plans had a greater actual return on plan assets than EDS' return of 15%, the highest in 2006.
Overall expected long-term rates of return remained steady, with only three of the top 100 plans raising their expected rate of return and 13 lowering it.
CIGNA Corp., Philadelphia, set its expected rate of return to 8.0% in 2007, up from 7.5% in 2006. Bank of New York Mellon (BK) and EDS each raised their expected rate of return by 10 basis points. The average of all 100 plans remained at 8.4%.
Overall employer contributions fell in 2007. The top 100 corporate pension plans contributed $17 billion to their pension plans in 2007, down 31.7% from $25 billion in 2006. Contributions had also fallen slightly in 2006, down 26.7% from $36.7 billion in 2005.
Raytheon Co., Waltham, Mass., made the largest contribution to its pension plans at $1.3 billion. Its funded ratio increased to 90.2% in 2007, up from 82.8% the previous year. Raytheon was the only company to contribute more than $1 billion to its plan.
Exxon Mobil Corp., Irving, Texas, made the next-highest contribution, at $800 million. Its funded ratio increased to 88%, up from 86.3%. Rounding out the top five were Verizon Communications Inc., New York, $737 million; Boeing Co., Chicago, $580 million; and FedEx Corp., Memphis, Tenn., $524 million.
The top 100 plans announced expected contributions of about $8.9 billion total in 2008.
Eight of the top 100 plans saw their funded ratios drop in 2007, up from four in 2006. However, four of those plans still have funded ratios of more than 100% and none has a funded ratio of less than 92%.
Time Warner Inc., New York, had the greatest drop of 6.2 percentage points, to a 94.8% funded ratio in 2007, down from 101.0% in 2006.
Airlines were again the worst-funded plans, although their funding did improve over the year.
Delta had the worst-funded plan, with a funding ratio of 66.1% in 2007, up from 60.8% in 2006. Northwest Airlines Inc., Eagan, Minn., was next, with a funding ratio of 68.7%, up from 67%. Northwest's actual return on plan assets was 7.1%.
A provision in the Pension Protection Act of 2006 allows both Delta and Northwest to use a discount rate of 8.85% to calculate their underfunding. The new discount rates will be effective for 2008. Delta and Northwest used discount rates of 6.1% and 6.3% respectively for 2007. Delta and Northwest also made employer contributions of $125 million and $79 million respectively.
The other funds in the bottom five also remain the same from last year:
• ConocoPhillips, Houston, had a funded ratio of 73.3%, up from 69.6%, with a contribution of $385 million, a discount rate of 6% and an actual return on plan assets of 7.6%.
• Delphi Corp., Troy, Mich., had a funded ratio of 76.5%, up from 71.9%, with a contribution of $209 million, a discount rate of 6.35% and actual return on plan assets of 8.0%.
•AK Steel, Middletown, Ohio, had a funded ratio of 79.1%, up from 73.1%, with a contribution of $252.1 million, a discount rate of 6%, and actual return on plan assets of 10%.
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The funded status of U.S. corporate pensions
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Funding ratios increase
Nine of the top 10 corporate plans reported funding surpluses, and all of them reported increases in their funded ratios.
The largest corporate pension plan, General Motors Corp., Detroit, reported $104.1 billion in assets and $85.3 billion in projected benefit obligations, for a funded ratio 122%. Actual return on plan assets was 9.7% in 2007, down from 13.2% in 2006.
Lockheed Martin, Bethesda, Md., was the only plan in the top 10 without a funding surplus, reporting a funded ratio of 96.9% in 2007, up from 90.2% in 2006.
By contrast, eight of the top 10 plans were underfunded in 2002, and the top 100 plans were underfunded by a total of $140.6 billion.
“We're still in that period of flotsam and jetsam, but what's pretty clear is that the environment that we're living in today is better than it was two years ago, and the reasons for that are primarily driven by the legal and legislative changes we've seen,” said Kevin Wagner, retirement practice director in Watson Wyatt Worldwide's Atlanta office.
The PPA is one of those changes that led plans toward a better funded status, and many plans have investigated liability-driven investing.
“Not an awful lot of them have adopted them yet. Corporate America is, for the most part, saying I can live with the short-term volatility. They'll take the intelligent gamble,” Mr. Wagner said. “The PPA is a pretty good thing. It allows for cash balance plans, and the funding requirements are really not that onerous.”
Defined benefit plans may be forced to disclose more details of their investment allocation if a proposal by the Financial Accounting Standards Board is adopted.
The proposal amends Statement 132R, the Employers' Disclosures about Pensions and other Postretirement Benefits, and plans with fiscal years ending after Dec. 15, 2008, would be required to release more details about their investment allocations.
For example, of the top 100 corporate pension plans, 79 plans disclosed allocations to equity without breaking it down into subclasses.
Multiple defined benefit plans have protested the proposal. According to Christine Klimek, communications manager of the FASB, reconsideration could begin in June, resulting in the board modifying, scrapping or keeping the proposal (Pensions & Investments, May 12).
Separately, FASB officials have yet to announce the second phase of FAS 158. The first phase, which required corporations to reflect their plans' liabilities on their corporate balance sheets, took effect in September 2006.
In the second phase, the FASB is expected to decide whether to switch to accumulated benefit obligation as the liability measurement going forward, or to continue using projected benefit obligation.
Contact Rob Kozlowski firstname.lastname@example.org