5 years of corporate funding gains gone

The top 100 U.S. corporate pension plans saw their funded status drop by nearly 30 percentage points in 2008, giving up all gains of the previous five years, according to Pensions & Investments' review of annual reports.

The plans had an aggregate funding deficit of $198.9 billion in 2008, based on projected benefit obligations, a sharp reversal from surpluses of $111.1 billion in 2007 and $37.3 billion in 2006.

That's the worst since 2002, when the top 100 plans had an aggregate deficit of $151 billion.

Gains of the previous five years were erased by plunging markets and declining corporate bond yields, with the average actual return on plan assets at -30.7%.

Only three plans saw positive actual returns, two of which — General Mills Corp., Minneapolis, and FedEx Corp., Memphis, Tenn. — have fiscal years that ended last May, well before the market's collapse. The third, Prudential Financial, Newark, N.J., had an actual return on plan assets of $334 million, or 3.4% of plan assets. The average actual return on plan assets was 9.4% in 2007 and 11.7% in 2006.

The pension deficit, combined with pressures of the Pension Protection Act of 2006, mean companies will have to ramp up pension contributions, according to Steven J. Foresti, managing director at Wilshire Associates, Santa Monica, Calif.

“A lot of corporations came into this environment with really solid balance sheets, so while it's been a tough environment, I think many corporations were able to make sizable contributions.” Mr. Foresti said.

Company contributions rose slightly in 2008, to $19.1 billion from $17.3 billion in 2007. Three companies each contributed more than $1 billion to their plans last year: Bank of America Corp., Charlotte, N.C., at $1.4 billion; Raytheon Co., Waltham, Mass., $1.2 billion; and Merck & Co. Inc., Whitehouse Station, N.J., $1.1 billion.

There's also a danger that “the timing of the PPA and the timing of a horrendous market” will force more employers to freeze their defined benefit plans, Mr. Foresti said. The number of Fortune 1000 companies that sponsor one or more frozen DB plans increased to 169 in 2008, from 138 in 2007 and 113 in 2006, according to a Watson Wyatt Worldwide study.

On Dec. 23, President George W. Bush signed The Worker, Retiree and Employer Recovery Act of 2008, a law easing some funding regulations put in place by the Pension Protection Act of 2006, such as the requirement of what interest rates plan sponsors must use to calculate pension liabilities. The act also allowed pension plans to smooth the value of pension assets over 24 months.

Despite the legislation, pension executives have been lobbying for further relief from PPA requirements. A proposal being considered by Democratic members of Congress would give additional breaks to active plans, provided they are not frozen for several years.

“You want to keep the system alive, and it's delicate and the timing was such that it wasn't in place very long before some tweaks were needed,” Mr. Foresti said.

“What companies have learned over the last two years is that they need retirement systems (that) are sustainable,” said Kevin Wagner, retirement practice director at Watson Wyatt in Atlanta.

“A lot of companies are looking at their plans and making sure they make sense from a financial perspective and an HR perspective,” he added. Plan sponsors will be looking at long-term solutions that fit a wide variety of economic environments, Mr. Wagner said.

“The crisis we are clearly going to see is that people will not have sufficient assets to retire. It's possible that companies will revisit this when people are "retired on the job,'” Mr. Wagner said.

“If you're going to participate in risk-based investments, there is no avoiding this kind of situation,” added Mr. Foresti. “To find yourself at 81% funded when there have been two bear markets in the last decade, it kind of puts things in perspective.”

“Once the doctor tells you you're going to die, and then you realize you're not going to, you're feeling pretty good,” Mr. Wagner said.

Of the 12 plans that were fully funded, the best-funded for the fourth year in a row was FPL Group, Juno Beach, Fla., with a funding ratio of 156% despite a return on plan assets of -34.9%. The plan's funding ratio in 2007 was 216.5%.

The second-best was General Mills, with a funding ratio of 128.1%.

Rounding out the top five were MeadWestvaco Corp., Glen Allen, Va., with a funded ratio of 126.4% in 2008, down from 152.2% in 2007; Prudential Financial, Newark, N.J., at 120.1%, down from 126.5%; and Alcatel-Lucent, 115.3%, down from 132.9%.

The worst-funded pension plan was Delta Air Lines Inc., Atlanta. This was the first year in which Delta assets were combined with assets of Northwest Airlines; the companies merged in 2008. Delta's funding ratio in 2008 was 45.8%. In 2007, Delta's funding ratio was 66.1% while Northwest's was 68.7%.

The Delta plan's actual loss on plan assets was $1.1 billion, or 14.9% of the fair value of plan assets. In 2008, Delta contributed $125 million to its pension plan. It expects to contribute $275 million in 2009.

The next worst-funded pension plan belonged to Exxon Mobil Corp., Irving, Texas. The plan's funding ratio in 2008 was 50%, down from 88% in 2007. The actual return on plan assets was -47.2%. The company contributed $52 million to its U.S. defined benefit plan in 2008 and expects to contribute $3 billion in 2009.

ConocoPhillips, Houston, saw its funding ratio fall to 51.4% in 2008, down from 73.3% in 2007. The plan's actual return on plan assets was -35.4% and the company contributed $407 million to its U.S. pension plan in 2008. The company intends to contribute $930 million to the plan in 2009.

Delphi Corp., Troy, Mich., had a funding ratio of 53.9% in 2008, down from 76.5% in 2007. The plan had the worst actual return on plan assets on a percentage basis of the top 100 plans, with a loss of $3.2 billion, or 51.3% of the fair value of plan assets.

Delphi reported an allocation of 55% equities, 20% fixed income, 8% private equity, 11% real estate and 6% other for its U.S. pension plan in 2008 in its 10-K.

Rounding out the bottom five was CIGNA Corp., Philadelphia, at 54.8%, down from 84.5%.

J.C. Penney Co. Inc., Plano, Texas, saw the greatest change in funding ratio, with the ratio falling 61.9 percentage points to 92.6% in 2008 from 154.5% in 2007. The actual loss on plan assets was $1.56 billion, or 45.2% of plan assets.

The average discount rate used to determine benefit obligations rose for the third year in a row to about 6.4%, from 6.26% in 2007. The average discount rate in 2006 was 5.86%.

Fifty of the top 100 plans increased their discount rates, 20 of them by 50 basis points or more. Twenty-five plans kept the same discount rates.

The average long-term expected return on plan assets fell to 8.22% in 2008 from 8.41% in 2007. Only three plans raised their long-term expected return on plan assets.

A proposal by the Financial Accounting Standards Board amending Statement 132R was postponed by one year and will take effect Dec. 15, 2009. The new amendment requires defined benefit plans to release more information about their investment allocations.

In addition, there has yet to be further movement on Phase II of FAS 158, in which the board was expected to decide whether to measure liabilities using accumulated benefit obligations in place of the current measurement using projected benefit obligations.