The 20 largest corporate defined benefit plans saw their collective funded status drop by more than $30 billion in 2000, but still managed to post a combined $7 billion to their companies corporate profits, according to a study by Milliman USA. The funded status declines represent a loss of 25% of the companies pension surpluses.
The losses primarily are due to weak asset returns, low interest rates and an aging work force, the study said. However, the plans still contributed to company bottom lines, thanks to their overfunded status, accounting rules that allow deferral of gains and losses, delayed recognition of past gains and losses, and smoothing of asset values.
Companies will need investment returns of more than 18% this year to cover losses in 2000, according to the study. If market returns stay low, two scenarios could emerge, according to Milliman. Corporate pension plan losses would rise steadily; or, if expected annual returns are lowered from the current 9.5% to 7.5%, companies would see an immediate and sizable reduction in pension income roughly $800 million for a $40 billion pension plan.