PHILADELPHIA - Phew!
The double whammy of lousy stock returns and sliding interest rates made last year the worst in a decade for pension plan sponsors.
A new study by Towers Perrin shows that a traditional corporate pension plan, investing 60% in stocks and 40% in bonds, earned a pathetic 0.8% last year, while liabilities soared 11.6%.
In 1990, the traditional plan lost 1.3% on assets, but liabilities dropped 0.7% that year.
Throughout the rest of the 1990s, pension plans enjoyed double-digit returns on their assets, while their liabilities fluctuated from year to year in tandem with interest rates. Thus, in 1991, while the typical corporate defined benefit plan earned a handsome 25.7% on its assets, liabilities soared 20.7%, and in 1995, when the benchmark pension plan earned a spectacular 27.1%, liabilities ballooned 33.3%, outstripping the growth in assets. By contrast, while the typical plan earned 13.6% on its assets in 1996, liabilities fell 0.8%, Towers Perrin's study reports.
The Towers Perrin report confirms the findings of an earlier report by Ryan Labs Inc., New York, that observed that 2000 was the worst year for all pension plan sponsors, not just corporate defined benefit plans (Pensions & Investments, Dec. 25).
Despite last year's poor performance, plan sponsors still are far ahead of where they were just five years ago. The benchmark plan enjoyed a hefty surplus at the end of 2000 of 161.9% of promised benefits. And while that surplus was slimmer than the 177.4% at year-end 1999, it still is a huge leap from the 119.3% of accrued benefit obligations that corporate pension plans had built up by the end of 1995.
"We had one bad year, but we also had four or five great years before that, so we should take that into perspective," said Richard Q. Wendt, a principal in Towers Perrin's Philadelphia office and author of the report. "There may be uncertainty going forward, but plan sponsors are much more looking at the linkage between assets and liabilities, and that should reduce some of the volatility in plans' financial results."
What's more, because many companies smooth out the effects of their pension funds' investment performance over five years, they might not see any negative impact on their 2001 pension expenses.
Towers Perrin's report comes just weeks ahead of the 2000 annual report season, when companies will disclose just how badly their pension funds did last year. Accounting rules require companies to disclose the financial performance of their pension funds in their annual financial statements.
In their upcoming annual reports, corporate pension plan sponsors are expected to disclose they have assumed lower interest rates to value their liabilities. The yield on long-term corporate bonds dropped to 7.41% at the end of 2000 from 7.9% at the end of 1999, and "that is an indicator that FAS 87 rates might drop a similar amount," Mr. Wendt said.
Financial Accounting Standard 87 is the accounting rule that requires companies to disclose their pension obligations in their financial statements.
Mr. Wendt, however, does not expect companies to assume lower returns on their pension fund assets.
Large companies assumed, on average, that they would earn 9.17% on their pension assets in 1999, according to consulting firm Watson Wyatt Worldwide (P&I, Aug. 7).