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July 11, 2005 01:00 AM

Edging toward balance

P&I’s review of annual reports shows Top 100 pension plans’ funded status improves

Rob Kozlowski
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    Table: Funded status of the largest DB plans

    Unfunded pension liabilities continued to decline in 2004 because of improved investment returns and slightly increased contributions, but at a slower pace than in 2003, according to Pensions & Investments' review of annual reports.

    The unfunded liabilities of the largest 100 corporate defined benefit plans fell 21.9% in 2004 from the previous year. In 2003, liabilities had fallen 41% from 2002.

    In dollar terms, the top 100 plans were underfunded by $69.5 billion, down from $89 billion in 2003 and $151 billion in 2002.

    Employer contributions dropped 27.7% to $37.3 billion in 2004, from $51.6 billion the previous year.

    However, in 2003, a full 36% of the total contributions came from General Motors Corp., New York, which had contributed $18.6 billion to its severely underfunded plan.

    Without General Motors' contribution, the other 99 corporations on the 2003 list contributed $33 billion to their plans. In 2004, General Motors reported a funding surplus, with an asset-to-liability ratio of 101.7%.

    The largest contribution in 2004 came from Boeing Co., Chicago, with $3.6 billion. The contribution, together with an actual return on plan assets of $4.3 billion, helped Boeing reduce its underfunded status dramatically. In 2004, Boeing reported a $3.8 billion shortfall, with an asset-to-liability ratio of 91.1%. In 2003, Boeing had a shortfall of $6.7 billion and a ratio of 83.2%.

    Boeing plans to contribute $1 billion to its pension funds in 2005, with $455 million already contributed in the first quarter and an additional $545 million expected later in the year, according to a filing with the SEC (P&I Daily, April 27).

    Other plans among the largest 100 that contributed more than $1 billion to their plans in 2004 were: Ford Motor Co., Detroit, $2.3 billion; Deere & Co., Moline, Ill., $1.55 billion; Bank of America, Charlotte, N.C., $1.45 billion; Chevron Corp., San Ramon, Calif., $1.33 billion; United Parcel Service, Atlanta, $1.2 billion; JPMorgan Chase & Co., New York, $1.1 billion; United Technologies Corp., Hartford, Conn., $1.02 billion; and DaimlerChrysler Corp., Auburn Hills, Mich., and SBC Communications Inc., San Antonio, $1 billion each.

    Expected contributions for 2005 total about $18.7 billion.

    Firms that have already contributed large amounts in 2005 include: International Business Machines Corp., White Plains, N.Y. with $1.7 billion contributed in the first quarter, according to the company's 8-K filing (P&I Daily, April 15); Ford Motor Co., which had contributed $2.4 billion to its plan as of April 30 and will contribute an additional $400 million later this year, according to a 10-Q filing (P&I Daily, May 17); and Verizon Communications Corp., New York, which contributed $698 million to its qualified plans in the first quarter and expects to contribute a total of $730 million for the year, according to a 10-Q filing (P&I Daily, May 9).

    ABO vs. PBO

    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.

    Problems with smoothing

    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.

    No investment losses

    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.

    Better than 10%

    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.

    Making assumptions

    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

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