Fidelity Takes the Knife to its Pension Return Projection

March 6, 2003 ( - The nation's largest retirement-fund manager again flashed its long-standing fiscal conservatism by lowering the expected annual returns on its employee pension to 7% - one of the lowest at any major US company.

Boston-based Fidelity Investments has long kept its pension benchmark at 7.75% even at the market’s 1999 peak, when giddy plan sponsors around the country bumped up their annual return projection to a rich 10% or higher. However, according to a Boston Globe report, Fidelity made the latest move to drop to 7% after a third straight year of bloodletting in the equity markets and as bond yields slumped to new lows.

”We always make the most conservative of assumptions on our pension plan,” Fidelity spokeswoman Anne Crowley told the Globe.

At other employers:

  • Citigroup Inc. recently lowered its pension target to 8% from 9.5%
  • IBM Corp. has lowered its return goal to 9.5% from 10%
  • The Massachusetts state Legislature set 8.25% for the state’s pension fund.

But legendary investor Warren Buffett has suggested that 6.5%, on average, is more realistic for the foreseeable future.

Fidelity’s decision comes as employers continue to struggle on how best to pay for their pension obligations in the midst of a stubborn bear market that has produced little else except a string of losses.

Underfunding Woes

Fidelity saw its future pension liability soar 36% last year, to $790.1 million, while the plan shed 2% of its assets, because of the market’s slide. But the firm is now staring at a $415.5 million gap between cash on hand and the money it will have to pay retirees down the road. That’s up 65% from the end of 2001 – and the figure is now roughly half of 2002 Fidelity’s net income.

Crowley told the Globe that Fidelity’s liability won’t come due until way in the future. The firm is young, with an average age of 36. It paid out a meager $1.9 million in pension benefits last year.

Fidelity ended 2002 with $374.6 million in its pension coffers, including its annual cash contribution of $53.2 million. That’s about the same amount Fidelity contributed to the plan last year – the most permitted under federal tax law, Fidelity said.

Fidelity offers the traditional defined benefit pension plan that it pays for as well as a defined contribution 401(k) program to which workers contribute. The firm’s pension plan covers workers who stay at least five years.