Corporate and public pension fund officials are taking diametrically opposed approaches to dealing with their severely underfunded plans, with corporate plans going for safety by cutting risk and public ones pushing for big returns by adding risk, according to a forthcoming report from Greenwich Associates.
Corporate plan officials — driven largely by impending mark-to-market accounting rules — continue to lower the risk levels of their funds, indicating their willingness to trade higher contributions for less volatility and more predictability.
Public plan officials, however, unconstrained by accounting rules yet hampered by an inability to boost contributions, are adding risk in an effort to make up funding declines with investment returns.
“There's clearly a derisking going on that's continued despite the fact that, because of the historically low levels of interest rates and the decline in market values, corporate pension funds are substantially underfunded,” explained Chris McNickle, an analyst at Stamford, Conn.-based Greenwich Associates, in an interview. “And that implies a willingness or acknowledgement that they're going to have to make contributions” to become fully funded once again.
“Public funds are going in a different direction,” he continued. “They've got huge (funding) gaps and they're trying to make that up by excess returns. It looks to us like they're trying to respond to the problem of underfunding by swinging for the bleachers and taking additional risk.”
According to the Greenwich Associates report, which is based on interviews with officials at more than 1,000 of the largest tax-exempt institutional funds in the U.S., the average funded ratio among public pension plans fell to 83% last year from 86% in 2008. In addition, more than 30% have funded ratios of 79% or lower and more than one in 10 has a funded ratio of 69% or lower.
The survey period was from September 2008 to September 2009.
The drop in funded ratios for corporate pension funds last year was more dramatic, according to Greenwich, but mainly because they started from a stronger position.
Average funding ratios for the projected benefit obligation of U.S. corporate pension funds fell to 80% in 2009 from 101% in 2008. The proportion of corporate pensions funded at less than 85% rose to 57% in 2009 from roughly 8% in 2008 and the share funded at less than 75% increased to 31% from less than 1%.
Overall, the value of assets in the portfolios of U.S. defined benefit plans declined to $5.9 trillion in 2009 from $7.2 trillion in 2008, representing a retreat to asset values last seen four to five years ago, according to Greenwich Associates.