The overall best-funded plan for the second consecutive year was FPL Group Inc., Juno Beach, Fla. In 2006, FPL had a funded ratio of 200.1%; a year earlier, the ratio was 195.1%.
Second for the year was MeadWestvaco Corp., Glen Allen, Va., with 137.4% in 2006, up from 125.6% in 2005.
The rest of the top five were: Bank of America Corp., Charlotte, N.C., at 132.4% in 2006, up from 112% in 2005; Dominion Resources Inc., Richmond, Va., 130.7% in 2006, 113.7% in 2005; and Prudential Financial Inc., Newark, N.J., 130.4% in 2006, 122.9% in 2005.
The worst-funded plans on a percentage basis were airlines, although their funding ratios improved.
Delta Air Lines Inc., Atlanta, was the worst, with a funding ratio of 60.8% in 2006, up from 50.6% in 2005. The improvement was due to termination of the firms pilots pension plan last September. The remaining plans actual return on plan assets was 14% in 2006, compared with 15.2% in 2005. Delta contributed $5 million to the plan last year.
Northwest Airlines, Eagan, Minn. was second worst, with a funding ratio of 67% in 2006, up from 61.2% in 2005. Its actual return on plan assets was 13.9% in 2006, up from 8.8% in 2005. Northwest contributed $86 million to its plan in 2006.
A key provision in the Pension Protection Act will give the two airlines 17 years to fully fund their plans, as well as allow them to use a discount rate of 8.85% to calculate their underfunding Deltas discount rate was 5.88% last year; Northwests was 6%. The higher discount rates mean the plans will look fully funded sooner. (Last month, President Bush signed into law a bill allowing American Airlines Inc., Fort Worth, Texas, and Continental Airlines Inc., Houston, to use a discount rate of 8.25%.)
Rounding out the list of the five worst-funded plans: Conoco¬Phillips, Houston, with a funding ratio of 69.6%, up from 59% in 2005; Delphi Corp., Troy, Mich. 71.9%, up from 70.6%; and AK Steel, Middletown, Ohio, 73.1%, up from 67.4% in 2005.
Few worse off
Only four of the largest 100 plans saw their funded ratios drop in 2006, compared with 45 in 2005. Duke Energy Corp., Charlotte, N.C., had the biggest decrease, to 89.7% from 103.3% in 2005. Dukes actual return on plan assets dropped to 7.3% in 2006 from 13% in 2005, and the firm contributed $124 million to the plan in 2006. Its expected long-term rate of return was 8.5% both years.
The other three firms that saw funded ratio drops were: Wells Fargo & Co., San Francisco, to 120.4% in 2006 from 122.2% in 2005; FedEx Corp., Memphis, Tenn., to 83.4% in 2006 from 84.9% in 2005; and DTE Energy Co., Detroit, to 86.5% in 2006 from 2005.
Among the 10 largest plans, meanwhile, eight reported funding surpluses.
General Motors Corp., Detroit, the largest U.S. corporate pension plan, had a funding ratio of 118.7% in 2006, up from 106.9% in 2005. The return on plan assets was 13.2%, up from 11.5% in 2005, according to the annual report. GM contributed approximately $80 million to the plan in 2006.
Second-place AT&T Inc., San Antonio, recorded an increase in part because this was the first year the company included BellSouth Corps assets in its totals. AT&T completed its purchase of BellSouth in December.
AT&T reported $69.2 billion in fair value of plan assets as of Dec. 31, with a projected benefit obligation of $56 billion, for a funding ratio of 123.8%. In 2005, AT&T reported plan assets of $48.8 billion with a PBO of $46.2 billion, and BellSouth reported plan assets of $16.2 billion with a PBO of $11.9 billion, for a combined funding ratio of 112%.
Lockheed Martin Corp., Bethesda, Md., had the worst funded ratio of the largest 10 plans in 2006: 90.2%, up from 82.4% in 2005. The actual return on plan assets was 11.8% in 2006, up from 6.7% the year before. The company contributed $693 million to the plan in 2006.
Corporations continued to make significant contributions to their plans, although they were lower than when the pension funding crisis was at its peak. Overall, employer contributions to the top 100 plans dipped to $26.1 billion in 2006, down 26.7% from 2005.
Exxon Mobil Corp., Irving, Texas made the largest contribution $2.383 billion last year, and had the greatest increase in funding ratios among the top 100 plans, to 86.3% in 2006 from 64.8% in 2005. Exxon Mobil had one of the five worst funding ratios in 2005.
Bank of America, Charlotte, N.C., contributed $2.2 billion in 2006, and increased its funding ratio by 20.4%, the second-largest increased among the 100 plans.
Three other firms contributed more than $1 billion in 2006: United Parcel Service Inc., Atlanta, $1.425 billion; Northrop Grumman Corp., Los Angeles, $1.157 billion; and International Paper Co., Memphis, Tenn., $1.027 billion.
After Exxon Mobil and Bank of America, the three firms with the most-improved funding ratios also showed the highest increases in their discount rates.
Walt Disney Co., Burbank, Calif. had a funding ratio of 88.9% in 2006, up from 68.9% in 2005. The firm had increased its discount rate to 6.4% last year from 53%. Emerson Electric Co., St. Louis, had a funding ratio of 113% in 2006, up from 93.4% in 2005. Emerson increased its discount rate to 6.5% in 2006 from 5.3%. General Mills Inc., Minneapolis, had a funding ratio of 124.4% in 2006, up from 105% in 2005. It increased its discount rate to 6.6% in 2006, from 5.6%.
Higher discount rates
In fact, 86 of the top 100 corporate pension plans increased their discount rates in 2006 after several straight years of lowering discount rates. The average discount rate among the top 100 plans rose to 5.8% in 2006, from 5.6% in 2005, due to rising interest rates.
Another big change is that, for the first time, plans liabilities were reflected on corporations balance sheets. The Financial Accounting Standards Board issued FAS 158 in September 2006, requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position, according to the summary on the FASB website. The rule took effect on Dec. 15.
We sit back and think as corporate decision-makers, or as an investor: What does that mean in terms of the value of the company? From an economic reality, nothing has actually changed. You see it stated all the time that this move will remove $X billion from balance sheets. These arent $X billion that have suddenly disappeared, said Steven J. Foresti, managing director at Wilshire Associates, Santa Barbara, Calif.
Uncertainty over phase 2
FASB officials have not yet announced when they intend to implement he second phase of the overhaul of pension accounting. In that phase, the board is expected to decide whether plans will continue to measure liabilities using projected benefit obligations, switch to accumulated benefit obligations, or use a new system.
The current use of the PBO projects future salary increases into the calculation of obligations, while the ABO does not include projections. Last July, despite many objections, the FASB announced its intention to stick with PBO during the first phase of accounting changes. (Pensions & Investments, July 24, 2006).
If you have a plan, as it evolves over time and its a pay-related plan, the progression of ABO is slower early and faster later. The PBO, because it takes into account the impact of future pay, is a little bit more manageable or realistic progression of the liability, said Michael Hall, director, investment strategy at Russell Investment Group.
Phase two is going to be a work in progress that has been talked about for a while, but there isnt any obvious action on it yet in terms of FASB meetings. Its going to be awhile before that happens, said Alan Glickstein, a senior consultant at Watson Wyatt Worldwide in Dallas.
As for high investment returns, the average among the 100 largest defined benefits plans was 11.5%, up from 9.7% in 2005.
Electronic Data Systems Corp, Plano, Texas, had the highest return on plan assets 15% in 2006, up from 14.2% in 2005. The firms expected long-term rate of return was 8.4% in 2006, down from 8.6% in 2005.
J.C. Penney Co. Inc., Plano, Texas, and Eastman Kodak Co., Rochester, N.Y., both had investment returns of 14.8%, up from 11.4% and 12.3%, respectively, in 2005. J.C. Penneys expected long-term rate of return was 8.9% for both years, and Eastman Kodak lowered its rate to 8.6% in 2006 from 9% the year before.
The average expected long-term return on plan assets decreased to 8.4% in 2006 from 8.5% in 2005.
Of the top 100 plans, only Abbott Laboratories, Abbott Park, Ill., increased its expected long-term return on plan assets, to 8.5% in 2006 from 8.4% in 2005. Of the top 100 plans, 72 left the returns unchanged.