2008 Wipes Out Almost All 2007 Pension Funding Gains

April 16, 2008 (PLANSPONSOR.com) - Milliman's latest study of 100 public company defined benefit pension plans has found that asset losses, coupled with dropping interest rates during January 2008, wiped out nearly all of the funded status gains made in 2007.

The new Milliman 100 Monthly Pension Funding Index said the funded status of the pension programs studied was just below 100% at the end of the first quarter factoring in the increase of $85 billion in funding status during 2007 and an estimated first-quarter 2008 funding status decline of $62 billion.

“2007 was a year of reassessment and implementation of new investment policies as pension plan sponsors responded to the new pension funding reform law, new accounting standards, improved funded status, and emerging demographic trends,” wrote authors John Ehrhardt and Paul C. Morgan. “However, 2008 has started out with losses in funded status. Asset gains or increases in interest rates will be needed to recover the gains realized during 2007.”

class=”Pa1″> The Milliman research found that pension expense decreased in 2007 to $19.3 billion (from $27.3 billion the year before), boosting the earnings of the companies studied   by $8 billion. There were 16 companies with pension income in 2007, up from eight in 2006. Pension expense is expected to continue to decline into 2008.

class=”Pa1″> The picture coming into 2008 involved building on 2006 gains (See   Large DB Plans Reached nearly 100% Funding in 2006 ) for additional 2007 advances, although made for different reasons than those in 2006, Milliman said. Liabilities decreased (from $1,249 billion to $1,243 billion) as the result of increases in interest rates (5.75% to 6.20%). Asset gains (actual returns of 9.9% versus expected returns of 8.3%) contributed to an increase in funded status from 99% at the end of 2006 to almost 106% at the end of 2007.

class=”Pa1″> The Milliman data shows that actual asset returns (9.9%) bested expected returns (8.3%) during 2007, the fifth straight year of asset advances. Expected returns have leveled off (8.3% in 2006 and 2007) after declines in prior years.

class=”Pa1″> Finally, the percentage of pension assets invested in equities declined from 60% to 55% during 2007, a shift of almost $60 billion of assets from equities into fixed-income and other investments. According to Ehrhardt and Morgan, that represents the impact of companies adopting vari­ous types of liability-driven investment (LDI) strategies, which usually result in more fixed-income investments with durations similar to the pension liabilities, with the goal of reducing the future volatility of funded status.