Investing November 1, 2001

Pension Assets Dip, Obligations Rise in Q3

November 1, 2001(PLANSPONSOR.com) - The average corporate pension plan shrink by 11.1%, and the average public plan lose 11.8% on a year to date basis, and an increasing number of plan sponsors may need to contribute to their funds for the first time following the boom in the 1990s, according to a new report.
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The report, by William M Mercer, also reveals that in the third quarter of 2001:

  • the average corporate plan returned a negative 8.4%,
  • while the average public plan lost 8.3%

Breaking those numbers down further, the survey found that:

  • corporate plans over $1 billion in size slipped 8.8% for the quarter and 11.8% for the year,
  • while public plans with over $1 billion in assets fell 8.5% for the quarter and 11.2% for the year

Funding Requirement

Corporate plans, required by the Employee Retirement Income Security Act of 1974 to calculate their funding requirements using the 30-year Treasury bond, will be hardest hit.

The rate of the bond, now at a low of 5.3%, is 2% lower than other long-term bonds and will probably go lower following the government?s announcement that they will no longer be issued (see 30-Year T Bond Marked for Extinction ).

The low rate of return translates to an artificially high funding requirement, a cost that many companies can ill afford in the current economic landscape.

Corporate plans that fall below the 90% funded industry standard for more than two years are legally bound to pay steep premiums to the Pension Benefit Guaranty Corp.

Public funds have more leeway since they do not have the same funding requirements.

The report was based on a survey of 188 corporate plans and more than 100 public plans, most of which were over $200 million in size.

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