Funded status of top corporate pension plans falls 5 points in '11

The average funded status of the 100 larg-est U.S. corporate pension plans dropped more than five percentage points in 2011, giving up small gains made in the past two years, Pensions & Investments' analysis of annual reports shows.

The average funding ratio decreased to 81.6% in 2011, down from 86.9% in 2010 and 83.7% in 2009. The funding ratio was 79.1% in 2008, the peak of the financial crisis.

“There was a slight deterioration in funding levels in 2011,” said Steven J. Foresti, Santa Monica, Calif.-based managing director at Wilshire Associates Inc. “We find ourselves, in large part because of 2008, still working things out.”

He added: “The asset side of the ledger was damaged. It went from at or about 100% funded to a sharp deterioration.”

The plans in P&I's universe had an aggregate funding deficit of $258.3 billion in 2011 vs. $167.3 billion a year earlier.

Several years of improvement led to a funding surplus of $109.9 billion in 2007, but that surplus evaporated. By 2008, there was a deficit of $198.9 billion.

A spike in liabilities led to 2011's underfunding. While assets of the 100 plans increased $22 billion overall to a total of $1.06 trillion, that couldn't keep pace with liabilities, which increased by $113 billion to $1.32 trillion.

Low interest rates — which brought down the discount rates used to value liabilities — were one of the main culprits behind the decreased funding levels.

“What has prevented (funded status) from going up more is a drop in interest rates,” said Alan Glickstein, Dallas-based senior retirement consultant with Towers Watson & Co. “That's the key driver in 2011. If it weren't for that, it would have continued to improve.”

The average discount rate among the largest U.S. corporate pension plans dropped 66 basis points to 4.78% in 2011, from 5.44% in 2010. The average discount rate used in 2008 was 6.44%

“As interest rates come down, you end up with a higher liability value and lower discount rate,” Mr. Glickstein said. “You can't control interest rates. One of the reasons they are low now is because of government policy to stimulate the economy.”

According to Bruce Klug, consulting actuary for Buck Consultants, Chicago, liabilities would decrease by 25% to 30% if rates were to increase by 200 basis points. Although Mr. Klug said an increase in interest rates would be a “beautiful scenario” for liabilities, a 200-point swing would also cause a drop in fixed-income assets, so plans can't solely rely on a boost in interest rates, especially when it is uncertain when the rates will increase again.

“I keep trying to convince myself that maybe this is the bottom, but I said that last year, and (interest rates) continue to go down,” Mr. Klug said. “But with inflation picking up, I don't see how they can keep them this low. The Fed has given every indication that they're going to keep interest rates low, at least in the next two years. While liabilities will change a lot with a 200 basis point swing, I don't know when it's going to happen.”

Nine of the top 100 plans showed a funding surplus in 2011, down from 11 plans the previous year.

The plan of NextEra Energy Inc., Juno Beach, Fla., had the highest funding ratio in 2012 at 147.1%. The company — known as FPL Group until May 2010 — had $3.12 billion in plan assets and $2.12 billion in projected benefit obligations. Although it was the company's seventh straight year topping the list, its funding ratio was down 15 percentage points, from 162.1% in 2010.

MeadWestvaco Corp., Richmond, Va., was second on the list, with a funding ratio of 132.1%. The company had $3.97 billion in plan assets and $3 billion in projected benefit obligations.

Following were H.J. Heinz Co., Pittsburgh, which had a funding ratio of 117.9%, with $3.26 billion in plan assets and $2.77 billion in PBO; J.P. Morgan Chase & Co., New York, with a funding ratio of 115.8%, with $10.47 billion in plan assets and $9.04 billion in liabilities; and Alcatel-Lucent, Murray Hill, N.J., with a funding ratio of 108.2% from $32.7 billion in plan assets and $30.23 billion in liabilities.

The airline industry once again was at the bottom of the list. In last place was Delta Air Lines Inc., Atlanta, which reported $7.79 billion in plan assets and $19.29 billion in PBO, for a funding ratio of 40.4%, down seven percentage points from 2010. Although Delta has ranked last on the list each year since 2005, the 2011 funding ratio is the lowest ever reported. Delta contributed $598 million in 2011 and reported a -0.21% actual return on plan assets.

American Airlines Inc., Fort Worth, Texas, was the second-worst funded plan with $8.31 billion in assets and $14.57 billion in PBO, for a funding ratio of 55.8%. The company contributed $525 million to its pension plans in 2011 and reported an actual return on plan assets of $614 million, or 7.55%.

Rounding out the bottom five were Goodyear Tire & Rubber Co., Akron, Ohio, with a funding ratio of 59%, General Dynamics Corp., Falls Church, Va., with a funding ratio of 61%, and Exxon Mobil Corp., Irving, Texas, with a funding ratio of 62.6%.

Contributions decreased slightly in 2011, but were still significantly higher than in previous years. Total contributions by the largest 100 U.S. corporate pension plans were $42.1 billion, down from about $47.1 billion in 2010.

“The contributions level came down a bit, but it's up a significant amount in the past few years,” Mr. Foresti said. “It's still at a high level. That's been the case over the past three years as these plans work toward their funded status.”

In 2008, contributions totaled $19.1 billion, with three plans each contributing more than $1 billion. In 2011, 13 plans had contributions of at least $1 billion, two more than in 2010.

“If you look at the overall pension system, you see a big jump in contributions,” Mr. Glickstein said. “A large part of that is paying off the deficits created in 2008. Contribution shortfalls are made up over the years, so there's a little bit of a delay, and over the next few years contributions are going to be dramatically higher.”

Lockheed Martin Corp., Bethesda, Md., made the largest contribution in 2011, with $2.29 billion. The firm reported $27.3 billion in plan assets and $40.62 billion in liabilities, for a funding ratio of 67.2%.

The second largest contribution came from Pfizer Inc., New York, which reported $2.17 billion in contributions. Pfizer had $12 billion in plan assets and $16.27 billion in PBO, for a funded ratio of 73.8%.

The rest of the top five contributors were: Exelon Corp., Chicago, a $2.09 billion contribution; General Motors Co., Detroit, $1.96 billion; and Raytheon Co., Waltham, Mass., $1.83 billion.

“I think of all the things we saw last year, contributions is the biggest trend that we'll see over the next several years,” said James Gannon, director of asset allocation and risk management for Seattle-based Russell Investments. “Making contributions to close these funded gaps, and the stress to make these contributions, is going to be a common theme.”

Among the companies that saw the greatest increase in their funding ratios in 2011 were Morgan Stanley, New York, with a hike of 13 percentage points, to 102.5%, followed by Exelon, which increased by 12.7 percentage points, to 83.5%. Rounding out the top five were: Alcatel-Lucent, which increased 10 percentage points to 108.2%; General Mills Inc., Minneapolis, with a funding ratio of 95.6%, up eight points; and Heinz, at 117.9%, up seven points.

Exxon Mobil had the largest decline in its funding ratio, falling 19.6 percentage points to 62.6%. Next was J.C. Penney Co. Inc., Plano, Texas, which dropped 19.3 percentage points to 97.7%. The others were: Bank of New York Mellon Corp., New York, at 96.98%, down 18.6 points; General Electric Co., Stamford, Conn., at 69.6%, down 16.5 percentage points; and NextEra Energy, at 147.1%, down 15.1 points.

“If you measure it mathematically, (pension plans) are doing worse than 2010, but still climbing up from 2008,” Mr. Glickstein said. “The health of pension plans is best measured over a period of time, and the current market measures build in all sorts of things that don't indicate less healthy or healthier.”

Another trend among the top 100 U.S. corporate pension plans in 2011 was the continued shift away from equities. In 2011, the weighted average allocation to equities was 40.9%, down from 43.8% in 2010. Fixed income was also down, to 35.2% in 2011 vs. 36.3% a year earlier.

“We're still seeing a general decrease in the level of equities and an increase in levels of liability-driven investment,” Mr. Gannon said. “Clients are going toward LDI strategies for more risk management, and investing in alternative asset allocation to just have a wider range of returns from all different strategies.”

The top 100 U.S. corporate pension plans expect to contribute at least $30.8 billion this year. Nine companies plan to contribute more than $1 billion each, starting with Ford Motor Co., Dearborn, Mich., which is slated to contribute $2 billion. But that's not surprising; Mr. Glickstein noted that contributions are expected to increase during the next few years.

“Market measures are going to bounce around a bit,” Mr. Glickstein said. “But it shouldn't overly concern stakeholders because the ups and downs are to be expected. It's important to keep a long-term perspective in mind.”