The stock market would have to fall more than 20%, or even 30% -- or more -- before the surplus assets amassed by large corporate defined benefit pension plans would evaporate, according to industry specialists.
"You'd have to see the Dow at 8,000 for the average corporation to have to make a change in their (pension) contributions," said Gordon Gould, Towers Perrin chief actuary and principal, based in the Denver office.
That would mean a more than 30% fall in the market, based on a recent Dow Jones industrial average of 11,550.
Most pension plans are sufficiently well-cushioned to withstand even severe stock market shocks, the specialists said.
The typical plan would not necessarily immediately feel even such a severe fall in the market.
Although such a drop would deflate asset cushions and shatter investment confidence, it likely would not mean corporations would have to increase contributions to their pension plans right away.
"Even in a year when the market produced a big loss, because of the smoothing technique (used to value plans for funding purposes), the actuarial results move modestly, even though the market results look bad," said Daniel F. McGinn, president and chief actuary, McGinn Actuaries Ltd., Anaheim, Calif..
No one was making a prediction on the stock market, just considering a worse-case scenario.
"Could we have a 1969-'70 or a 1973-'74 or worse?" asked Frank Sortino, director, Pension Research Institute, Menlo Park, Calif., referring to big drops in the stock market. "Why couldn't there be something as surprisingly bad as we've had surprisingly good?"
But even with a precipitous drop, he said, "It would certainly seem the excess assets give wonderful protection to defined benefit plans."
A big drop in the stock market, however, would have a major impact on those plans that are not well funded.
While the typical corporate plan is well funded, funding at companies range all over the map.
"If you had a 20% drop in the stock market, you'd see a large number of companies have to make significant contributions, although the average company might still not have to change its contributions," Mr. Gould said.
"In the absence of a downturn in the market, we are expecting pension expense and contributions to decline in the next couple of years," he added, even if the market is mediocre.
Contributions to the defined benefit plans of the 200 largest U.S. employee benefit funds declined for the third year in a row in 1999, according to data collected by Pensions & Investments from the plan sponsors.
The rising market
Messrs. Gould and McGinn attribute the decline to the continuing rise in the stock market and, to a lesser extent, the rise in interest rates in the past year.
Contributions to corporate, public and Taft-Hartley funds in the Top 200 totaled $38.1 billion last year, down from $39.2 billion in 1998 and $44.1 billion in 1997.
But the contributions by the top 200 funds still are nowhere near their lowest in the past 10 years, which was $29.6 billion in 1991. They are, however, well below their 10-year peak of $53.1 billion in 1995.
Contributions declined from 1998 to 1999 at 16 of the 27 corporate plans in the top 200 for which comparisons were available, while rising at nine of them and staying the same at two.
Mr. Gould estimates the average large plan now has $135 in assets for every $100 in liabilities.
In the next year, he said, assuming liabilities were to grow to $110, investment returns would have to fall 20% for assets to shrink to $110.
But, he added, "A 20% drop in the stock market might affect a pension fund only 70%, because 30% of its assets may be invested in bonds."
Corporations use two methods for valuing their pension plans.
As he explained, under the method used for valuing assets and liabilities on an actuarial basis to determine contributions, a market drop would be amortized over a number of years, mitigating any devastating loss in any one year.
But for public financial statements, corporations use market value to ascertain the value of the pension plan. A market drop would reduce asset valuations immediately and affect pension expenses in the corporation's income statement, or its bottom line and theoretically its stock price.
Funding less sensitive
For actuarial purposes, most corporations spread investment results over a five-year period. They recognize in any one year only 20% of the investment results, above or below the assumed actuarial rate of return.
So funding is less sensitive to the stock market, Mr. Gould added.
In light of the rising stock market, he doubts corporations will raise their rate of return assumptions unless the Dow falls significantly and inflation goes up.
