Milliman: Pension Assets Up 19.6% in 2003

April 7, 2004 ( - Last year was good to the asset levels at defined benefit pension plans of the largest U.S. companies, but even with large gains, the aggregate funded status of these plans managed to improve only slightly due to depressed interest rates and their influence of plan liabilities.

Reversing three years of negative numbers, the average actual return on assets in defined benefit plans was 19.6% in 2003, representing more than a two-fold increase of the average expected rate of return (8.55%) for the year , according to Milliman USA’s fourth annual survey of defined benefit plans at the 100 largest U.S. corporations.    As a group, these firms had $880 billion in pension plan assets at the end of 2003.

Companies also chipped more into their defined benefit plans in 2003.  Employer contributions increased $22.2 billion to a total of $56 billion in 2003, from $33.8 billion in 2002 .   This continues a trend of increased contributions by companies.   Looking back at last year’s results, Milliman saw the 100 major U.S. corporations more than tripled their pension contributions in 2002 from 2001’s levels (See   2003 Pension Contributions Predicted to Double Over 2002 ).

However, it should be noted a significant portion of the increase – $13.9 billion – was attributable solely to General Motors (GM).    Thus with GM weighing heavily on the numbers, among the 64 companies that increased employer contributions, the median increase in employer contributions was 138%.   Yet, GM was not alone in devoting more money to their defined benefit plans, as 47 companies had increases in their contributions greater than 50%.   

Other than companies with increased pension contributions, there were eight companies that saw contributions decrease in 2003 by more than 50%.    Next year’s numbers will similarly be modified, as GM, which made extraordinary contributions in 2003 will thus show a contribution decrease of more than 50% for 2004.   Currently, GM is projecting an employer contribution of $120 million for 2004.   

Deficit Reclaim

Even with such strong gains in assets in 2003, pension funds at the 100 largest U.S. corporations still lag the expected return over the past four years.   Looking back to 1999, Milliman finds that plan have earned, on average, an annual investment return of just 1.3%.

Further, as assets were increasing, discount rates used to measure plan liabilities continued to decline, increasing liabilities and offsetting some of the gains notched by the market returns.     Discount rates dropped to a median of 6.20% at the end of 2003 from 6.75% in 2002; ostensibly, pension liabilities increased 11.9% in 2003, after an increase of 11% in 2002.   Thus, the aggregate pension deficit only decreased by $43.2 billion, regaining about 12% of the $340 billion in assets lost over the preceding three years.   Additionally, with further liability losses in 2003, due to depressed interest rates and their inverse relationship with benefit liabilities, and smoothing of assets gains, pension expenses increased by $15.9 billion during 2003, producing an aggregate pension expense of $12.3 billion in 2003, from a pension income of $3.6 billion in 2002.  

Even with such a large drop in asset and funding levels during the bear market of the early 2000s John   Ehrhardt, a consulting actuary and principalin the New York office of Millimansaid during the briefing of the latest study’s results that “heady gains of the 1990s created this image of pension plans that cost nothing,” which he categorized as not “really reality” – culminating in an average funding ratio of 129.9% in 1999.   It is in the latest results that Ehrhardtand Milliman find more of a move toward reality in an average funding ratio of 88.5%, which improved from last year’s 82.3%. “A 90% target ratio is really fine,”Ehrhardtsaid.

The overperformance of pension fund assets relative to their expected rates of return will likely repeat itself in the future as expectations were uniformly lowered in 2003 in large part thanks to a move by the SEC.   "Due to the SEC saying anything over 9% will have their 10ks questioned," Ehrhardtsaid.  

Companies took the SEC seriously, as over 75% of the group in Milliman's study lowered their expected rate of return on plan assets to a median of 8.55%, down from a median expected rate of return of 9.5% in 2001.   In fact, only six of the 100 largest U.S. corporations showed assumed rates of return greater than 9%:

  • UPS (9.21%)
  • Northwest Airlines (9.50%)
  • Eli Lilly (9.27%)
  • Xcel Energy (9.25%)
  • Kroger (9.50%)
  • Supervalu (9.25%).

Speaking to those plans though,Ehrhardtsaid he was not aware if the SEC had as of yet raised questions about their rates in excess of the 9% "threshold."  

The expected payouts are also reflecting themselves in asset allocation models employed by pension funds.   "All new money is going into equities," Ehrhardtsaid, while companies devote their fixed-income holdings "All benefit payments are coming out of fixed-income."   This in turn reflects a shift by defined benefit schemes into more equity investments, as the median equity allocation now sits at 65%, compared to a median fixed-income allocation of 27%.  

The 100 largest U.S. corporations showed quite a large range though, from General Dynamics, which had 96% of its investment portfolio in equities to Loews with an equity allocation of only 15%.   Looking ahead, Ehrhardtexpects defined benefit plans will move the equity portion of their portfolios to 70% to 75%.  


For the most part, the constituents in 2004's release remained unchanged for the previous years, with the lone exception being El Paso Energy, which was replaced in this year's list by another energy company Dynegy.  

Milliman based the results of their analysis on pension plan information disclosed in the footnotes of companies' 2003 annual reports.   The analysis was limited to companies with a fiscal year ending on or before December 31, whose 2003 annual reports were released by March 18, 2004.   More information, and a copy of the study's results can be found at .