Lower discount rates and rising liabilities helped keep benefit payments growing among the largest 200 defined benefit pension funds last year.
1997 marked the fourth straight year payouts increased, according to Pensions & Investments' annual survey of the nation's top 1,000 pension funds. Consultants said the lower discount rates and the increasing liabilities because of restructurings, downsizings and reorganizations might be partly responsible.
According to the P&I survey, total benefit payouts for the top 200 defined benefit plans last year grew 15%, to $94 billion, up from $82 billion in 1996, $76 billion in 1995 and $66 billion in 1994.
Contributions to the top 200 pension funds have a more erratic history. They totaled $44 billion in 1997, up almost 16% from $38 billion in 1996. In 1995, contributions to the top 200 funds amounted to $53 billion, up from $41 billion in 1994.
Despite the uneven ride of the contributions, some observers do see a trend toward increased contributions to pension plans.
The information in P&I's survey was obtained from plan sponsors who completed a questionnaire for plan data as of Sept. 30. A close review of the 50 largest funds among the top 200 shows most experienced a small increase in benefit payments between 1996 and 1997 and the bulk also increased contributions by a small amount. Only a few plans disclosed large or outsized increases in either payments or contribution levels.
BellSouth Corp., Atlanta, for example reported an increase in benefit payments to $976 million in 1997, up from $619 in 1996, or about 58%. And AT&T Corp., reported more than doubling its benefit payments, to $1.97 billion in 1997 from $861 million in 1996. Representatives at both companies said the changes were due in part to reductions in their workforces.
A BellSouth spokesman would not attribute the entire increase in benefit payments to the company's reorganization and downsizing efforts, but noted the company is on track to fulfill a three-year projected reduction of 11,300 workers announced in 1995. In addition, he said the company eliminated 10,200 jobs in a 1993 corporate reorganization. Part of the workforce reduction, he said, included early retirement incentives including lump-sum payouts to certain management and midmanagement employees.
But most of the increases were of a more modest nature. For example, 1997 benefit payments at General Motors Corp., New York, totaled $4.7 billion, up 6,8% from $4.4 billion; the California Public Employees' Retirement System, Sacramento, had $4 billion in benefit payments in 1997 a 5% increase from 1996's $3.8 billion; and the New York State Common Retirement fund, $3.1 billion, up 7%.
Reported pension plan contributions had much the same gradual level of increases. The Ohio Public Employees' Retirement
System, Columbus, had $1.2 billion in contributions in 1997 up 9% from $1.1 billion in 1996; and the Public Employees' Retirement Association of Colorado, Denver, had $431 million in contributions in 1997, up 5.4% from $409.
Both Chrysler Corp., Auburn Hills, Mich., and Ford Motor Co. reported contribution decreases. Chrysler had contributions of $679 million in 1997 and $723 million in 1996, while Ford reported contributions of $307 million in 1997 and $434 million the year before.
Pension consultants attribute the steady increase in benefit payments, in part, to the composition of the largest 200 funds, dominated by large public pension plans that have continued to fund a growing appetite for improved benefits.
Downsizings and early retirement programs also might have played a part. At the same time, pension experts do not find the erratic year-to-year contribution levels unusual because of the smoothing effect of modifying actuarial assumptions used to calculate funding requirements.
Several consultants said they have seen an increase in contributions among their pension clients in recent months.
Tom Pipich, investment consultant with Buck Consultants, Pittsburgh, said he can see no anomalies in the P&I survey totals for contributions and benefit payments among the top 200 plans. If the 1995 and 1996 contribution totals are averaged together, the $45 billion puts those years in line with the 1997 total.
"Benefits are what they are; there is no lag. But contributions usually lag, and good investment returns may or may not show up immediately. The numbers aren't surprising. What you have is more liabilities actually coming to payment status being pushed by big retirement windows, restructurings and downsizing. But you don't see much change in contribution requirements because of investment returns. It's almost that straightforward," said Mr. Pipich.
Is the holiday over?
Mr. Pipich said the so-called "contribution holiday" enjoyed by many plans during the past few years might be coming to an end as liabilities increase.
In addition, he said, public plans have continued to make regular contributions to their plans even though most are pretty well funded.
"Public plans have continued to put money in where corporate plans may have not," Mr. Pipich said. "It's largely due to political inertia. And because it has been budgeted it takes many steps to get it changed. Also, there is some pressure among public plans to fund increased benefit levels."
The uneven totals for contributions also might be affected by the increasing allocations to equities by some large public plans, he noted.
Terry Bilkey, principal at Yanni-Bilkey Consulting, Pittsburgh, agreed that, even though most pension plans remain well funded, the funding holiday may be ending. He said that, for some, discounting pension liabilities at a lower rate means liabilities will have a higher present value and in the near future, "all of a sudden some plans will not be as well funded."
That as well as scheduled benefit payouts "gradually catches up with you, you can't go on forever without making contributions."
"Contributions are starting to come into play again, we've seen it in some of our clients," he said.
But not all pension industry specialists have noticed an increase in contribution levels to defined benefit plans.
Ethan Kra, principal and chief actuary at William M. Mercer, New York, said the booming stock and bond markets have continued to keep contribution levels low.
"The returns have been there and assets have kept growing. I have a couple of plans where I expect to retire before they ever put another penny into the plans in contributions," said Mr. Kra. "If the stock market continues to grow as it did in 1997 we will continue to see a great number of companies precluded from putting any money into their pension plans. But if (market) returns fall off, we may start to see companies making contributions in 1999."