Declining Bond Yields Clip Pension Funding in June

According to a press release, the funded status of the typical U.S. pension plan dropped 4.0% in June, as measured by the Towers Perrin Pension Index ⁽¹⁾ , according to the global professional services firm’s latest Capital Market Update (CMU).   The index, which reflects the asset/liability performance of a hypothetical benchmark pension plan, remains up by 1.4% year to date, but the June reading nonetheless represents a decline of 23% over the past 12 months.

The benchmark investment portfolio used in the Towers Perrin Pension Index experienced a 0.3% return for June and has returned 3.9% year-to-date, according to the consultant.   Further, the liabilities used in measuring the index (based on projected benefit obligations) were up by 4.6% in June and have now increased by 1.8% year-to-date.

Expanded Estimate

Towers Perrin’s monthly update has been expanded to include an estimate of the aggregated pension financial results for a group of 300 large U.S. companies, which the consultant has tagged the “TP 300.”   Those results indicate that the companies’ aggregate funded position changed from a $47 billion surplus as of their 2007 fiscal year-ends, to an unfunded amount of $339 billion at their 2008 fiscal year-ends – a decline of $386 billion for fiscal year 2008.  

The firm’s projection to June 30, 2009, indicates a current unfunded amount of $344 billion for these companies, a slight deterioration in funded status since the close of the 2008 fiscal years.

⁽¹⁾According to Towers Perrin, the index reflects the PBO funded ratio (market value of assets/projected benefit obligation) for a benchmark pension plan. The asset value changes from month to month based on the investment performance of the 60% equity portfolio, assumed contributions and benefit payments. Liability values increase with benefit accruals and interest cost, offset by benefit payments, and are adjusted to reflect changes in financial assumptions.    Contributions are set equal to the level of service cost for the benchmark plan. This implies that contributions offset the effect of ongoing benefit accruals; thus, the Pension Index captures the impact of capital market results alone.

Towers Perrin noted that those aggregate funded results are adversely affected by about 14% of companies with early measurement dates, e.g., September 30, 2008.   "For these companies, the losses experienced in the fall's capital market meltdown are included in their estimated June 30, 2009, results," the company said.  

Excluding the $28 billion decline in funded position since the 2008 fiscal year-end close for these companies, the aggregate funded status for the other TP 300 companies has increased $23 billion since their 2008 fiscal year-ends, generally consistent with the year-to-date move in the Towers Perrin Pension Index, according to the update.

"At the bottom line, we estimate a slight $5 billion decline in the aggregate funded status for the 300 companies since the close of the prior fiscal year. The fall-off in funded position can be attributed to interest costs in excess of realized investment return, offset by the positive impacts of contributions in excess of service costs and a small increase in discount rates," Towers Perrin noted in the report.

More information about the index is available  HERE .