Three new reports show that the funding levels of defined benefit pension plans have dropped substantially because of the decline in equity markets.
According to a Watson Wyatt Worldwide analysis, the 100 largest U.S. pension plans had a $217 billion deficit as of Dec. 31, compared to an $86 billion surplus at the end of 2007 a difference of $303 billion. Also, those companies plan to contribute more than $27.7 billion in cash this year, up 50% from the 2008 according to the analysis.
Aggregate funding levels fell by 30 percentage points in 2008, to 79% funded from 109% at the end of 2007.
Plan assets declined an average 26% for the year, but those with at least 90% of assets invested in equities lost an average of 32.3%, while plans with less than 20% in equities lost an average of 6%.
For the 83 companies that provided asset allocation information, equity targets for 2009 were similar to 2008 targets, but the actual allocations to equities declined due to the stock market drop. The average target equity allocation in 2009 was 55%, compared to 58% in 2008. Actual equity allocations fell to 48% at the end of 2008, down from 59% the year before.
Separately, the funded ratio for Towers Perrins hypothetical benchmark pension plan dropped 3.9 percentage points in February to a funded ratio of 60.2%, the lowest level since the firm created the benchmark in 1990. The plans equity portfolio has returned a cumulative -43% since the market meltdown started in September.
The benchmark plans portfolio is 60% equities and 40% fixed income. The decrease in value of the plan was partially offset in February by an increase in long corporate bond yields that pushed down liability values.
Pension funds are going through the same down period as everyone else who participates in the capital markets, Jerry Mingione, principal at Towers Perrin, said in a telephone interview. The timing and extent of the drop-off is of course coming as quite a shock to investors and financial managers.
Pension funds lost $54 billion in assets in February and $337 billion in the year ended Feb. 28, according to the Milliman 100 Pension Funding Index. Liability decreases of around $21 billion offset the losses for a net loss of $33 billion in funding status for the month; the years funding status fell because of a -26% asset return. Funding ratio for the pension plans Milliman analyzed fell to 71.7% in February.
The Milliman index tracks the 100 largest defined benefit pension plans sponsored by U.S. public companies.