There's no relief for corporate pension plans

Despite strong market performance and high employer contributions, the funded status of the 100 largest U.S. corporate pension plans remained relatively flat for 2012, according to Pensions & Investments' annual analysis of corporate SEC filings.

The average funding ratio dipped one percentage point in 2012 to 80.6%, down from 81.6% in 2011 and 86.9% in 2010. The 2012 funding level was only slightly higher than 2008, the peak of the financial crisis, when the average funding ratio was 79.1%.

“Fiscal growth in 2012 was very strong and asset growth was pretty robust, so you would expect that to improve funding ratios,” said Steven J. Foresti, managing director at Wilshire Associates Inc., Santa Monica, Calif. “But when you put all the numbers together, you realize they didn't improve, and in fact, they pulled back.”

In P&I's universe, the plans had an aggregate funding deficit of $301.6 billion in 2012, a $43.3 billion increase from the previous year.

Aggregate assets of the top 100 plans increased to $1.11 trillion, up from $1.06 trillion in 2011, partly because of strong market performance in 2012. The S&P 500 index gained 13% for the year; while the Russell 3000 index rose 16.4%; the MSCI All Country World index, ex-U.S., increased 16.4%; and the Barclays Global Aggregate Bond index was up 4.3%.

The average expected long-term rate of return was 7.73% in 2012, down from 7.94% a year earlier.

Total assets for the top 100 plans would have been larger except for buyouts and lump-sum payments offered last year by Verizon Communications Inc., General Motors Co. and Ford Motor Co. that caused those large corporations to report lower assets.

“Lump-sum (payments) and annuities can increase or decrease funded status,” said Justin Owens, asset allocation and risk management analyst at Russell Investments in Seattle. “On a funding basis, lump sums and annuities will decrease that status right now because of MAP-21. Lump-sum and annuity purchases are expensive ones on that basis.”

The Moving Ahead for Progress in the 21st Century Act, or MAP-21, also known as the federal highway bill, was signed into law last July to provide funding for infrastructure and transportation projects throughout the country, but also allowed sponsors to use a 25-year average rate to determine plan liabilities.

However, despite the funding relief and an increase in assets, aggregate liabilities increased $96 billion in 2012 to $1.42 trillion.

“The interesting thing is that investment return has been very good in the past year, and the level of plan sponsor contributions is the highest it's been in years, yet pension funding has fallen,” said Alan Glickstein, Dallas-based senior retirement consultant at Towers Watson & Co.

“The factor behind that is lower discount rates, which means higher liabilities, and that more than offset all the positive factors in 2012.”

Over the past several years, the Federal Reserve Board have been keeping interest rates low to stimulate economic growth, but this has also prevented discount rates and funding ratios from increasing.

The average discount rate among the largest U.S. corporate pension plans dropped 73 basis points to 4.05% in 2012, from 4.78% in 2011. The average discount rate used in 2008 was 6.45%.

“The low rates have caused pension plans to look enormous on balance sheets and has caused a drag on the earnings,” said Tony Abbazia, New York-based principal at Buck Consultants LLC. “Everyone expected interest rates to at least stay where they were at the beginning of last year, and the continued decline has just been a big surprise for most people.”

According to Mr. Abbazia, if discount rates were to jump 200 basis points, liabilities would decrease by 20% to 30%, but assets would likely move in the same direction. Therefore, companies cannot solely rely on interest rate increases and must also make greater contributions and produce higher investment returns to improve funded status in the future.

Despite the low interest-rate environment, nine pension funds were able to produce a funding surplus in 2012, the same number as the previous year.

The plan of NextEra Energy Inc., Juno Beach, Fla., had the highest funding ratio in 2012 at 142.7%, with $3.39 billion in assets and $2.37 billion in liabilities. Even though the funding ratio was down four percentage points from the previous year, it was the company's eighth straight year topping the list.

Second by that ranking was MeadWestvaco Corp., Richmond, Va., with a funding ratio of 141.4%. The company had $4.28 billion in assets and $3.03 billion in liabilities.

Rounding out the top five were J.P. Morgan Chase & Co., New York, which had funding ratio of 113.4%, with $13.01 billion in assets and $11.48 billion in liabilities; Alcatel-Lucent, Murray Hill, N.J., with a funding ratio of 109.1% coming from $32.71 billion in assets and $29.97 billion in liabilities; and H.J. Heinz Co., Pittsburgh, with a funding ratio of 107.2% from $3.14 billion in assets and $2.93 billion in liabilities.

The airline industry once again had the worst-funded plans. Delta Air Lines Inc., Atlanta, was at the bottom of P&I's list with a funding ratio of 38.1%, down two percentage points from 2011. For 2012, Delta had $8.2 billion in assets and $21.49 billion in liabilities. The airline, which has ranked last on the list since 2005, contributed $697 million in 2012 and reported an actual return on plan assets of $778 million, or 9.49%.

American Airlines Inc., Fort Worth, Texas, was the second-worst funded plan with $9.07 billion in assets and $15.9 billion in liabilities, for a funding ratio of 57%, up from 55.8% the previous year. The company contributed $277 million in 2012 and returned 13.28% on plan assets.

Following were General Dynamics Corp., Falls Church, Va., with a funding ratio of 59.7%; Sears Holdings Corp., Hoffman Estates, Ill., with 60.6%; and Goodyear Tire & Rubber Co., Akron, Ohio, with 60.7%.

When categorized by sector, energy companies had the lowest average funding ratio with 70.4% in 2012, followed by industrials with 73.8% and telecommunications companies with 75.9%. On the other end of the spectrum, the financial sector had the highest average funding ratio with 89.3%, followed by consumer staples with 85.7% and information technology at 82.2%.

One of the biggest trends among the top 100 companies was an increase in contributions, which totaled $47.4 billion in 2012, up from $42.1 billion the previous year.

“Companies contributed more than any time in the last five years,” Mr. Glickstein said. “If that large contribution didn't exist at all, (the funded status) would be roughly 4.5% worse than it is. So contributions do make a difference, but it doesn't close the gap.”

Ten companies contributed at least $1 billion in 2012, with four exceeding $2 billion and two companies exceeding $3 billion. Verizon Communications Inc., New York, was the top contributor in 2012 with $3.72 billion; it also reported $18.28 billion in assets and $26.77 billion in liabilities, for a funding ratio of 68.3%.

The second largest contribution came from Lockheed Martin Corp., Bethesda, Md., with $3.63 billion. The company had a 67.2% funding ratio from $30.92 billion in assets and $46.02 billion in liabilities.

The next top contributor was General Motors Co., Detroit, with a $2.42 billion contribution, followed by Ford Motor Co., Dearborn, Mich., with $2.13 billion.

In addition to higher contributions, both companies began offering voluntary lump-sum payments to employees in 2012 in order to reduce pension liabilities.

Although GM contributed more than $2 billion in 2012, the company announced in its fourth-quarter earnings statement that it does not expect to make any mandatory contributions for the next five years.

Merck & Co. Inc., Whitehouse Station, N.J., rounded out the top five, contributing $1.84 billion in 2012.

“Largely in response to poor asset returns after 2008, there have been many more robust contributions,” Mr. Foresti said.

“When there's underfunding, contributions have to exceed that. There are also guidelines for required contributions, so if companies fall behind, they have to make up for that gap.”

Asset allocations were largely unchanged from 2011. The weighted average allocation to equities was 36.5%, up slightly from 36.2% in 2011, while the allocation to fixed income fell slightly to 40.1% from 40.7% in 2011.

“There's an interest, in general, in taking some of the risk out of the portfolio and moving towards an investment approach that's more of an asset-liability framework, and to do that over the long run you're going to take some risk out, but also some return,” Wilshire's Mr. Foresti said. “As funding improves, I expect to see some shift into fixed-income-type investments.”

Some companies in the top 100 already have announced contribution plans for 2013 totaling at least $21.3 billion, with three companies expecting to contribute more than $1 billion. Ford Motor Co. is expected to contribute the highest amount, with $3.4 billion.

“One thing we do know is that for the largest corporations, if they just pay what they disclosed in financial statements, we will see an increase in contributions in 2013. But it could be even more than what they listed,” Mr. Owens said.

“Of the largest ones, most don't have a funding requirement, but they left the possibility open. It's very possible we'll see an even bigger increase.”