According to the fifth annual report by consultant Wilshire Associates on defined benefit pension plans of the S&P 500 companies that sponsors such programs, assets rose $84 billion in 2004, from $1.031 trillion to $1.115 trillion, while liabilities increased $60 billion, rising from $1.154 trillion to $1.214 trillion. The combination closed the aggregate funding gap of the 332 plans studied from 89% to 92% funded, based on Wilshire’s analysis of the companies’ 10-k filings.
Still, 81% of the corporate pension plans in the analysis remain underfunded, unchanged from the
previous year’s study. The median corporate funded ratio is 85%, compared with 82% a year ago. The increase in funded status mirrored that of state pension plan findings by Wilshire Associates earlier this year (see Wilshire: State Pension Systems’ Funding Ratios Improve in 2004 ), and Milliman’s report of the funding status of 100 of the largest US pension funds (see Despite Asset Gains, Contribution Increases, DB Plans Struggle to Stay Even ).
The median 2004 investment return was 10.8%, down from 17.1% a year ago, but well ahead of the 9% loss two years ago. Offsetting that gain was a decrease in the median discount rate used to value pension liabilities, which fell from 6.25% to 5.90%, increasing aggregate liabilities 5% for the year.
Wilshire notes that just 64 of the 332 corporations in the study (19%) have pension assets that currently equal or exceed liabilities, roughly equal to the 61 in that status a year ago. By comparison, in 2001, 36% of those corporate plans were overfunded, as were 71% in 2000. The median corporate funding ratio currently stands at 85% for these plans, according to Wilshire, compared with 78% at the end of 2002, and 120% at the end of 1999.
Breaking apart the funding components, the Wilshire report notes that service costs - which arise from workers earning additional benefits from another year of service - added $28 billion (2%) to aggregate pension liabilities in 2004. The other two recurring components that annually affect the growth in liabilities - interest costs and benefits paid (the former increasing liabilities by $68 billion, the latter reducing them by $77 billion) combined with total service costs to represent an overall increase in pension liabilities by $19 billion net.
However, actuarial losses added another $53 billion. Those changes, which Wilshire notes result when actual experience differs from actuarial assumptions, combined with the aforementioned elements (and $12 billion related to "other" adjustments, generally related to pension plan acquisitions, and this year primarily tied to severance program related reductions in liabilities at Verizon) for a net $60 billion increase in liabilities in 2004.
The report notes that over the past four years firms have had to report large actuarial losses because the discount rate applied to benefits in valuing liabilities has fallen - and a lower discount rate increases the liability. As a generalization, the Wilshire report notes that a 1% decline in the discount rate causes a 10% increase in pension liabilities.
With regard to recurring items that annually cause changes in the asset side of the equation, Wilshire cites $48.2 billion in corporate contributions, an actual return on plan assets of $126 billion (a 12% average return on assets), and benefit payments, which reduced assets by the same $77 billion by which it reduced liabilities. While the amount of contributions was well off the $65 billion in 2003, some $18.6 billion of the prior year's total was General Motors. Excluding that impact, 2004 contributions were up $46.4 billion in 2003.
Wilshire notes that the median expected rate of return was 8.50% at the end of 2004, compared with 9.50% at the end of 2000. However, the consulting firm also notes that its long-term forecast for the return on corporate pension assets is only 7.25%, based on the typical asset allocation.
Among industries, the telecommunications sector (determined by their Global Industry Classification Standard sector) had the highest funding ratio (107.7%), but that was just a notch up from the 106% level in that sector a year ago. The largest improvement was found among companies in the financials sector, which saw its aggregate funding ratio rise to 102.0% (also the second highest overall) from 98.0% in 2003. The energy sector had the lowest funding ratio, 76.4%, but Wilshire noted that the sector also accounted for the smallest proportion of assets and liabilities in the surveyed companies, approximately 2.5% and 3.0%, respectively.
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