“Interest rates drove the pension funding deficit to record levels, and the record deficit drove everything else,” says John Ehrhardt, consulting actuary and co-author of the study. “We saw record pension expense and, for the first time in the history of this study, these pensions invested more heavily in fixed income than in equities. But it’s what we didn’t see that is perhaps most intriguing: Despite our prediction of record pension contributions, we instead saw contributions decline, setting up 2012 as a major contribution year for some of these companies. We’re already seeing evidence of this, with several companies making high-profile announcements about pension contributions in excess of a billion dollars.”
Major pension highlights for 2011 include:
• Contributions deferred to 2012 and beyond despite expectations for record contributions in 2011.
• While the $55.1 billion in contributions during 2011 was significantly greater than most prior years, the contribution total was $5.2 billion lower than the record level of $60.3 billion set during 2010. According to footnote disclosures and press releases, many companies have chosen to defer their pension contributions to 2012, and at least 10 companies have already disclosed to investors contributions in excess of $1 billion.
• Assets underperform expectations. The record growth in liabilities (9.3% over 2011) drowned out the 5.9% investment return for the year. These 100 companies had set an expectation that 2011 investment returns would be, on average, 7.8%.
• Record pension expense. The decline in discount rates drove record levels of pension expense. These 100 companies faced a $38.3 billion charge to earnings, $7.8 billion higher than the $30.5 billion in 2010. The prospects for 2012 are even more severe: Given the record-low discount rates, we estimate that 2012 pension expense will increase $16 billion, resulting in a record $54 billion charge to corporate earnings.
• Reduced reliance on equities and increased reliance on fixed income. Between 2010 and 2011, the percentage of pension plan assets invested in equities decreased from approximately 43.8% to 38.1%, while fixed-income allocations increased from 36.4% to 41.4%. For the first time in the history of the Milliman study, the allocation to fixed income exceeded the allocation to equities. This shift reflects the strong outperformance of fixed income over equities in 2011. It also reveals an emphasis on derisking by these 100 companies. Plans pursuing liability-driven investment strategies typically reduce their exposures to equities, increasing their allocation to fixed income, and lengthening the duration of fixed-income assets to more closely match their liabilities.
• Expectations for 2012 tempered by record pension funding deficit. With the Federal Reserve indicating its intention to keep interest rates low through 2014, pension liabilities will remain high, as will the deficit. Companies that deferred contributions may increase contributions significantly in 2012.
The annual study includes 100 of the largest defined benefit pension plans sponsored by U.S. public companies.
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