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.