Big contributions, returns cut pension liabilities 41%

Unfunded pension liabilities of the 100 largest corporate plans fell a whopping 41% in 2003, thanks to a 72% increase in employer contributions and the recovering stock market, Pensions & Investments' review of annual reports reveals.

In 2003, the largest corporate pension plans were underfunded by $88.7 billion, down from $151 billion in 2002 and about $108 billion in 2001.

Employer contributions soared to $51.5 billion in 2003, from $30 billion in 2002. In 2001, employer contributions to the largest DB plans totaled a paltry $8 billion.

Investment returns, meanwhile, jumped to a combined $150.7 billion in 2003, compared with a loss of $76.6 billion in 2002 and a loss of $72.4 billion in 2001. General Mills Inc., Minneapolis, was the only company reporting a negative return last year; its pension plan lost $6 million in 2003.

In 2002, only three of the 100 companies reviewed reported positive returns.

Nine corporations contributed more than $1 billion each to their plans last year: General Motors Corp., Detroit; Ford Motor Co., Dearborn, Mich.; Exxon Mobil Corp., Irving, Texas; Boeing Co., Chicago; DaimlerChrysler Corp., Auburn Hills, Mich.; Pfizer Inc., New York; ChevronTexaco Corp., San Ramon, Calif.; Federal Express Corp., Memphis, Tenn.; and United Technologies Corp., Hartford, Conn. Each exceeded the contribution required by the Pension Benefit Guaranty Corp.

"I think there's a variety of reasons that companies choose to contribute more than what's required. It's certainly something we're seeing more clients consider. They want to be able to able to tell their employees that they're doing the responsible thing," said Mike Pollack, a principal in the Stamford, Conn., office of Towers Perrin.

General Motors — sponsor of the nation's largest corporate pension plan — contributed 36% of the total, moving $18.5 billion into its U.S. hourly and salaried pension plans The fund had a staggering liability of $19.3 billion at the end of 2002, and the Pension Benefit Guaranty Corp. had required GM to contribute $15 billion to the pension plans by 2007.

The cash for GM's contribution came from a June 2003 sale of bonds and convertible securities and proceeds from the December sale of the company's Hughes Electronics Corp. division to News Corp.

The contribution, in addition to a 15.6% return on plan assets for 2003, helped increase GM's funded status to 98.7% last year, up from 76% in 2002.

In a conference call in December, John Devine, chief financial officer, said he didn't expect GM to make another contribution for 10 years.

"I think it's plausible," said Jeremy Gold, an independent consulting actuary in New York. "But I think they make that statement believing there won't be a change in funding rules, which I think is a little bit optimistic."

Ford made the second-highest contribution for 2003 — $2.2 billion — increasing the funded status of its pension plan to 91.5% from 80.4%. Ford contributed an additional $1.3 billion in the first quarter of 2004, with an expected year-end total of $1.9 billion, according to its 10-Q report.

Exxon Mobil contributed $2.1 billion to its pension plan in 2003, increasing its funded status to 71% in from 50.5% in 2002.

The average 2003 contribution among the 100 corporations reviewed was $515.5 million, up from $292.3 million. The average anticipated contribution for 2004 is $176 million.

Boeing, which had the largest shortfall for 2003 — $6.7 billion —contributed $1.7 billion to its plans in 2003 and an additional $1 billion in the first quarter of 2004. The plans had a shortfall of $7.1 billion in 2002. Its funded status improved a bit, to 83.2% in 2003 from 80.2%.

"We may contribute further to our plans in 2004 and are evaluating an additional discretionary contribution" of up to $1 billion this year, according to the company's first-quarter 10-Q filing.

After Boeing, plans with the largest unfunded liabilities at year-end 2003 were: United Airlines Inc., Chicago, $6.2 billion; Delta Air Lines Inc., Atlanta, $5.7 billion; Delphi Automotive Systems Corp., Troy, Mich., $3.9 billion; Northwest Airlines Inc., Eagan, Minn., $3.7 billion; United Technologies, $3.7 billion; Raytheon Co., Lexington, Mass., $3.5 billion; and Lockheed Martin Corp., Bethesda, Md., $3.5 billion.

General Electric Co., Fairfield, Conn., had the highest surplus in 2003, as it had the year before: $6.1 billion for 2003 vs. $4.5 billion for 2002.

Verizon Communications Inc., New York, more than doubled its funded status with a surplus of $1.8 billion in 2003, up from $768 million at the end of 2002. Despite the surplus, Verizon contributed $285 million to the plan in 2003. Despite the collective surplus, the IRS calculates funded status on a plan-by-plan basis, and each of Verizon's 19 qualified ERISA pension plans needs to be funded, according to Verizon spokesman Bob Varettoni.

Overall, three of the 10 largest plans were fully funded in 2003, up from two the year before. But they still aren't back to where they were in 2001, when eight of the 10 were fully funded.

Though the average funded status for the top 100 rose to 89.4% in 2003 from 84% in 2002, 20 of the companies still had greater shortfalls last year than the year before.

Funding rules require some companies to average or "smooth" their assets and liabilities over a number of years. Most companies average pension assets over a five-year period and while their returns for 2003 were a definitive step up from the previous year, they will have to drop the far more impressive returns of 1998 from their calculations.

Walt Disney Co., Burbank, Calif., saw the biggest dip, with $1.1 billion in pension liabilities and a 71% funded status in 2003, compared with $231 million in liabilities and a 90% funded status in 2002.

Other plans with dramatic decreases in funded status were: General Mills, 92% funded in 2003, vs. 127% in 2002; Wyeth, Madison, N.J., 85.6% vs. 93.2%; and FedEx, 81.8% vs. 88.5%.

The worst-funded plan in 2003 was UAL Corp. United Airlines' parent — at 53.7%.

Still, UAL's funded status improved from 2002, when the plan was 49.7% funded. The improvement is due to a 20.1% return on investments in 2003.

The other two companies with a funded ratio (of plan assets to projected benefit obligations) of less than 60% were: Delta Air Lines, of 54.6% in 2003, down from 58% in 2002, and Northwest Airlines, at 56.2% in 2003, up from 48.3% in 2002.

Even though the economy is recovering, 75 of the companies reviewed lowered their long-term rate of return assumptions, and 26 reduced their assumptions by 100 basis points or more.

Of the 10 largest companies, only Ford and GE kept their long-term rate of return assumptions steady from 2002 to 2003, at 8.8% and 8.5%, respectively.

DaimlerChrysler made the biggest cut, reducing its assumption by 160 basis points to 8.5% in 2003 from 10.1% in 2002. IBM Corp., Armonk, N.Y., reduced its assumption by 150 basis points, to 8% in 2003 from 9.5% in 2002.

The average long-term rate of return assumption was 8.6% for 2003, down from 9.1% in 2002. That decrease might have been affected by a warning from the Securities and Exchange Commission in early 2003; the agency said it would challenge companies with rates exceeding 9%, an action prompted by investor concerns about artificially high return assumptions (Pensions & Investments, Feb. 3, 2003).

Of the 100 corporations reviewed for 2003, only seven reported long-term rate of return assumptions greater than 9%, compared with 57 in 2002 and 87 in 2001.

"That rate has come down gradually for the last couple of years as companies are revisiting their assumptions in light of changing economics," said Towers Perrin's Mr. Pollack. The warning "may have just accelerated the process."

"Within the four corners of (Financial Accounting Statement) 87, 8.6 is probably a trifle high. But within the better rules of financial economics, which will eventually inform both international and domestic accounting, 8.6 is wildly high," according to Mr. Gold. "The problem is the paradigm has not changed in the official pronouncements of any of the accounting organizations. None of them have changed yet, but the handwriting is on the wall. Eventually we will see actual returns reported."

The average discount rate for the top 100 corporate plans for 2003 dropped to 6.1%, from 6.7% in 2002. Every plan lowered its discount rate.

The SEC had warned companies earlier that it expected them to assume discount rates comparable to the interest rate on high-grade corporate bonds. According to Mr. Pollack, the discount rate has been "pretty consistent in relation to corporate bond yields."

Corporations added some new information to their annual reports for 2003.

Following the news that many of the largest corporate pension plans were severely underfunded in 2002 because of the bear market and falling interest rates, Wall Street firms and regulators demanded that accounting rules be changed to make the plans more transparent. As a result, the Financial Accounting Standards Board, Norwalk, Conn., instituted new rules requiring expanded reports including information on asset allocation.

Of the 10 largest plans reviewed, Ford's pension plan had the most aggressive asset allocation in 2003, with 72.2% of assets invested in equities in 2003, up from 67% in 2002.

General Motors, on the other hand, reduced its equity allocation to 49% in 2003, from 55% in 2002, and fund officials expect to decrease equities to 49% in 2004. The reductions are being made to decrease market risk, according to their GM's annual report.

The FASB is also requiring companies to estimate their planned pension contributions for the coming year. The 100 companies reviewed estimated approximately $15.3 billion in combined contributions for 2004, with Boeing expecting the largest: $2.2 billion, of which $1 billion was already contributed in the first quarter.