Edging toward balance

Liabilities — calculated by fair value of plan assets vs. projected benefit obligation — might be more accurate if accumulated benefit obligations were used instead.

Jeremy Gold, an independent consulting actuary in New York, said: "The world is becoming more aware that the significant number is ABO (accumulated benefit obligation) instead of PBO (projected benefit obligations)."

PBO assumes that all employees will stay until normal retirement age and includes compensation and additional-years-of-service estimates. ABO is what is owed to all employees today.

Mr. Gold said: "It's the actuary's guess as to some future salary, but it is not the practical implication for the fund ratio for flat salary plans. The companies where most of their liabilities are related to salaried employees instead of flat-dollar employees, the difference between the ABO and PBO is more significant. What you'll project is that the ABO is the more significant."

Investment returns for the top 100 corporate plans were healthy in 2004, but dropped from the previous year, following a slowdown in market growth.

The total return on plan assets for the top 100 plans was $108.6 billion in 2004, a 27.9% drop from $150.7 billion in 2003.

Often, firms "smooth" their assets and liabilities over five years in order to fulfill funding rules. This has the effect of averaging a firm's pension numbers over the course of five years, so the losses and gains of specific years are smoothed.

According to Ron Ryan, CEO of Ryan ALM Inc., "There's several problems (with smoothing). The asset side is usually a five-year smoothing, and that would overstate assets by most probably over 20%. The liability side is perhaps the worst. Under the Pension Equity Act of 2004, they're priced off of a blend of three corporate bond indexes and this most probably understates liabilities by about 15%. Now you put the two together. They're not additive, but so when you put the two together you'll most probably get a funded ratio of maybe 30% overstated."

"Until you know the true economic values of the assets and liabilities, how in the world can you understand what's going on here? It's the rules that drive the pension business and because they distort the true economic values, the true funded ratios. It tends to lead to inappropriate asset allocation, inappropriate benefit decisions, inappropriate contribution decisions. It's all linked," said Mr. Ryan.

General Motors had the largest return — $11 billion in 2004, or 12.2% of plan assets. IBM had an actual return of $5.2 billion, or 11.6% of plan assets.

None of the top 100 corporate plans reported any investment loss last year.

The plan with the lowest reported return was Emerson Electric Co., St. Louis, with an actual return of $74 million, or 3.8% of plan assets. The firm's funded ratio was 98.4% in 2004 and 86.7% in 2003.

FPL Group Inc., Juno Beach, Fla., reported the best-funded plan, with $2.9 billion in plan assets and $1.6 billion in benefit obligations, for an asset-to-liability ratio of 183.9%.

FPL's discount rate in 2004 — which is used to calculate the present value of liabilities and largely affects funding status — was 5.5%, the same as the previous year.

The next best-funded plan was BellSouth Corp., Atlanta, with $15.6 billion in plan assets and $11.7 billion in benefit obligations, for a ratio of 133.2%, and a discount rate of 5.25% in 2004, down from 6.25% in 2003.

MeadWestvaco Corp., Stamford, Conn., had $3.4 billion in plan assets and $2.7 billion in benefit obligations, for a ratio of 127.4%, and a discount rate of 5.75% in 2004, down from 6% in 2003.

JPMorgan Chase, New York, reported $9.6 billion in plan assets and $7.6 billion in benefit obligations, for an asset-to-liability ratio of 126.9%. The firm's plans were combined with Bank One as of Dec. 31, following its acquisition of the firm earlier in the year. In 2003, Bank One had reported a funded ratio of 123.6% and JPMorgan Chase, 105%. In 2004, the combined firms' discount rate was 5.75% in 2004, down from 6% for both JPMorgan Chase and Bank One in 2003.

Hewlett-Packard Co., Palo Alto, Calif., saw the second largest drop in funded ratio, with 65.3% in 2004, down from 75.9% despite an investment return of $376 million, or 11.6% of plan assets. The employer contribution to the plan was $10 million. As of the publication of its annual report, HP reported an expected contribution of $850 million in 2005.

Among the top 100 plans, 73 plans experienced a return of 10% or greater of their plan assets.

Aviation companies made up the worst-funded plans.

United Airlines Inc., Elk Grove, Ill., had the worst funded plan both in terms of dollar amount and funded ratio, with a shortfall of $6.4 billion and a funded ratio of 52.7% in 2004, compared with $6.2 billion and 53.1% in 2003. United's investment return was $843 million in 2004, with company contributions to the plan totaling $200 million before the company ceased making contributions last July.

U.S. Bankruptcy Court in May approved a takeover of United's four plans by the Pension Benefit Guaranty Corp., the largest termination in the history of the agency.

Other firms with large shortfalls were: Delta Air Lines Inc., Atlanta, $5.3 billion, with an asset-to-liability ratio of 56.4% in 2004, up from 54.6% in 2003; Lockheed Martin Corp., Bethesda, Md., $4.9 billion and an asset-to-liability ratio of 82%, down from 85.8% in 2003; and Northwest Airlines Inc., Eagan, Minn., $3.8 billion and an asset-to-liability ratio of 58.7% in 2004, up from 56.2% in 2003.

While the market remained steady in 2004, it was a far cry from the dramatic recovery in 2003 when rising markets helped unfunded pension liabilities drop 41% from 2002.

Despite that 2003 recovery, 75 of the top 100 companies had lowered their long-term rate of return assumptions that year. In 2004, 28 of the top 100 companies lowered their long-term rate of return assumption. The average long-term rate of return assumption for the top 100 plans for 2004 was 8.6%, down slightly from 8.7% in 2003.

Only two firms decreased their assumptions by as much as 100 basis points in 2004, compared with 26 firms that did so in 2003. Southern California Edison Co., Rosemead, Calif., reported an assumption of 7.5% in 2004, down from 8.5% in 2003; FedEx reported a long-term rate of return assumption of 9.1% in 2004, down from 10.1% in 2003.

Five firms in the top 100 still have assumptions greater than 9%, down from seven in 2003. General Mills has the highest, with an assumption of 9.6% in 2004, down from 10.4% in 2003. In 2004, General Mills reported a pension surplus of $272 million.

The second highest assumption, reported by both Northwest Airlines and Weyerhaeuser Co., Federal Way, Wash., was 9.5%. Eli Lilly & Co., Indianapolis, had an assumption of 9.2%.

correction appended