The dramatic fall in the market value of equities coupled with the decline of corporate bond yields crushed the funded status of U.S. corporate pension plans in 2008, according to several year-end studies.
An estimate by Adrian Hartshorn, principal in Mercers financial strategy group based in New York, put the average return for pension assets held by S&P 1500 companies at -22.8% in 2008.
As a result, companies will need to reassess the asset allocation and risk tolerance of their pension plans, and more plans could be frozen in 2009 due to the steep fall.
Weve seen another perfect storm thats been even more accelerated than the 2000-2003 timeline, and now were going to see how the (Pension Protection Act of 2006) and the rigors of the PPA affect the behavior of sponsors, Peter Austin, Boston-based executive director of BNY Mellon Pension Services, said in an interview. The wide swings in the markets and bond spreads were so dramatic; they just crushed (corporate) pension plans. The Russell 3000 declined 38.7% for the year and the corporate AA bond curve went from 5.8% on Dec. 31, 2007, to a high of 7.12% on Oct. 17, 2008, before falling back down to 5.54% on Dec. 31, 2008.
The typical U.S. corporate pension plans funded status fell 31.5 percentage points in 2008, Mr. Austin said, with much of that coming in the last quarter. At the end of September, the typical U.S. corporate pension plans ratio had only dropped 4.4 points.
Liabilities rose 20.3% in December while corporate bond yields dropped 125 basis points, leading to the dramatic drop in funded status.
The deficit for U.S. and non-U.S. defined benefit plans sponsored by S&P 1500 companies hit a record of $409 billion as of Dec. 31, according to estimates by Mercer. Funded status for the plans dropped from 104% at the end of 2007 to 75% by year-end 2008, by Mercers calculations representing a 29-percentage-point drop. Mr. Hartshorn said Mercer could not break out the non-U.S. funds from the total, but U.S. funds comprise about 90% of the sample; 772 of the companies in the S&P 1500 report defined benefit obligations in their SEC filings.
While funded status of defined benefit plans sponsored by S&P 1500 companies flirted around 75% in 2003 after a fairly similar falling stocks/rising liabilities scenario occurred the current $409 billion deficit is the largest Mercer has seen in the past decade, Mr. Hartshorn said during a conference call with reporters. He added that its most likely the largest deficit since 1987, but because defined benefit plan asset values were much smaller at that time, the real dollar value deficits could not have reached the $409 billion level, he said. Over a one-year period, theres no precedent for the fall in funding levels.
In a note to clients, New York-based Morgan Stanley estimated that funded status for U.S. corporate pension plans, based on the Russell 3000 universe, dropped 18.9 percentage points to 83.7% at year-end 2008 from 102.6% a year earlier.