The nation's 100 largest corporate defined benefit plans faced more than $151 billion in unfunded liabilities in 2002 - up almost $43 billion from 2001.
Only 14 were fully funded at the end of 2002, according to Pensions & Investments' review of the companies' annual reports. A year earlier, 52 were fully funded.
The largest plan - General Motors Corp., Detroit - also faced the largest funding shortfall: a staggering $19 billion. The plan was 76% funded at the end of 2002, down from 88% in 2001.
GM contributed almost $5 billion to the plan in 2002, but only $99 million in 2001. The company also contributed $900 million in GM Class H common stock in the first quarter of 2003 and will contribute almost $13 billion to the combined pension and retiree health plans by the end of the year, according to a company spokesman. This cash contribution, generated by the June sale of bonds and convertible securities, will be made to partly fulfill the contribution required by the Pension Benefit Guaranty Corp. of $15 billion by 2007, the spokesman said.
Only two of the 10 largest plans surveyed - those of General Electric Co. and Verizon Communications Inc. - were fully funded in 2002, compared with eight of the top 10 a year earlier. Both plans were fully funded in 2001.
The funded status of three plans - GM, GE and Verizon - dropped by more than $10 billion each.
GE best funded
General Electric, Fairfield, Conn., the best funded of all the plans reviewed, had a surplus of $4.5 billion at the end of 2002 and a surplus of $5.5 billion at the end of the second quarter of 2003, according to a company spokesman. The company does not anticipate making a contribution to its pension plan through 2007, the spokesman said.
Verizon will make no "significant pension trust contributions" to the plan in 2003, according to its 2002 annual report, but expects to be required to contribute $125 million in 2004.
After GM, plans with the biggest shortfalls last yearwere Ford Motor Co., with an unfunded liability of $7 billion, compared with a 2001 surplus of almost $600 million; Boeing Co., also with an unfunded liability that exceeded $7 billion, compared with a $1 billion surplus in 2001; UAL Corp.'s United Airlines, more than $6 billion in unfunded liabilities in 2002, up from $2.5 billion in 2001; and Delta Air Lines Inc., with a 2002 funding shortfall of almost $5 billion, up from a 2001 shortfall of more than $2 billion.
The 100 plans surveyed were, on average, 84% funded in 2002, a decline from 103% in 2001.
Among the worst funded in 2002 were Northwest Airlines Corp., at 48%, down from 66% in 2001; United Airlines, 50%, down from 75%; ExxonMobil Corp., 51%, down from 66%; and US Airways Inc., down to 54% funded from 76% in 2001.
Airlines hit hard
Not surprisingly, airlines were especially hard hit. The defined benefit plan of Delta was 58% funded at the end of 2002, down from 78% at the end of 2001. American Airlines Inc.'s pension plan fell to 61% funded from 64% in 2001.
Northwest Airlines requested permissionin January from the Employee Benefits Security Administration to use more than $200 million in stock of subsidiary Pinnacle Airlines Inc. as its 2002 contribution to its underfunded pension plans. The company also asked the Internal Revenue Service to waive the $450 million it expects to be required to contribute to the plans in 2003, requesting to pay it over five years, from 2004 through 2008.
The biggest drops in funded status in 2002 were at MeadWestvaco, down to 112% from 187%; Weyerhaeuser Co., to 90% from 129%; Sempra Energy, to 87% from 122%; SBC Communications Inc., to 96% from 131%; and Energy East Corp., to 99% from 133%. (Westvaco Corp. was part of last year's annual report story. The company merged with Mead Corp. in January 2002, and for 2002 P&I used the new entity's annual report. )
Three plans managed to increase their funded status at the end of 2002, according to the review. Hewlett-Packard Co., rose to 58% funded from 53%; Wyeth was 93% funded, up from 92%; and Wells Fargo & Co. grew to 101% funded, from 99%.
Together, the 100 companies surveyed contributed more than $30 billion to their suffering plans in 2002, compared with more than $8 billion in 2001.
Caterpillar Inc., Peoria, Ill., announced last week that in 2003 it will contribute $563 million to its plans for U.S. employees. The company contributed $135 million to the plans in 2002, and only $3 million in 2001. The plans were 82% funded at the end of 2002, according to the company's annual report, down from 101%.
Confronted with falling interest rates and a bear market as well as increased scrutiny of corporate accounting methods, most plans adjusted their actuarial assumptions last year.
Fifty-two of the country's 100 largest corporate defined benefit plans lowered their expected rates of return on plan assets in 2002, according to their annual reports. Forty-six maintained rates of 9.1% or higher in 2002. Four raised their rates in 2002.
The average return assumption in 2002 was 9.1%, despite the Securities and Exchange Commission's warning earlier this year that it would challenge companies with rates exceeding 9%. The average rate used in 2001 was 9.5%.
Companies with the highest 2002 expected rates of return on plan assets were FedEx Corp., at 10.9%, unchanged from 2001; Weyerhaeuser, 10.5%, down from 11%, the highest rate used in 2001; Northwest Airlines, 10.5%, unchanged; General Mills Inc., 10.4%, unchanged; DaimlerChrysler Corp., 10.1%, unchanged; and Navistar International Corp., 10.1%, up from 9.9%.
Companies that raised their rates in 2002 were Nationwide Financial Services Inc., to 8.3% from 8%; Navistar, to 10.1% from 9.9%; General Dynamics Corp., to 8.3% from 8.2%; and The Dow Chemical Co., to 9.3% from 9.2%.
Nine of the 14 companies with 2002 rates of 10% or higher noted in their annual reports that they would use a lower rate for 2003.
A Navistar spokesman said plan officials had been confident they would gain 10.1% on investments last year, but since have responded to falling returns by lowering the 2003 return assumption to 9%, as stated in the company's 2002 annual report.
The plan's funding shortfall grew $480 million, to $992 million at the end of 2002, and the plan dropped to 72% funded from 85%.
GM maintained its 10% expected rate of return. But the plan will lower its rate to 9% in 2003, according to its 2002 annual report. The automaker stated in the pension footnote that the process for determining this rate "gives appropriate consideration to recent fund performance and historical returns, (but) the assumption is primarily a long-term prospective rate."
Thirty-five of the 100 companies stated their 2003 return assumptions on plan assets, and each was lower than that used in 2002.
These rates still are "ridiculously high," said Jeremy Gold, head of Jeremy Gold Pensions, New York.
A strict application of Financial Accounting Standard 87, the regulation dealing with pension plans, would lead to a rate of 6% or 7%, he said.