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.”