Pension Returns Come Up Short – Again

March 25, 2002 ( - It was a tough year for US markets, and also for the nation's pension plans, which, on average, missed targeted earnings projections for the second year in a row, according to PLAN SPONSOR's 2002 Defined Benefit Survey.

On average, survey respondents booked a -2.78% average return on pension plan assets, compared with an average target return of 8.65%.  Bigger pension plans generally fared worse than smaller ones, with those with between $1 billion and $10 billion in assets posting the worst average return,-3.84%, while those with more than $10 billion lost 3.42%.

Negative as Positive
Only pension plans holding between $200 million and half a billion dollars-a scant 9% of our sample-booked positive results, at a bland 1.02%.

Of course, during the same period, the S&P 500 lost around 12%, the Dow was down around 8% and the NASDAQ tumbled 20% – offering evidence of the benefits of diversification in the nation’s private pension system.

Target Sighting

A year ago, plan sponsors shrugged off the shortfall of earnings against targets, noting that such targets are set for the longer term and that, since most plan sponsors rightfully gauge the performance of plan assets over a number of years, one had to expect the occasional ‘dip.’

Lower returns contributed to lower funding levels.  Roughly 62% of the nearly 400 fund officials responding to our survey in January told us that they planned to make contributions to their defined benefit plans within the next 12 months.  More than three-quarters of those with less than $10 million in assets were contemplating funding, compared with just 69% a year ago.

Back to Normal

All in all, there remains a calm assurance among many plan sponsors that things will work out in the end.

‘One year or two years is too short a time frame’ from which to draw any definitive conclusions, says Bob Hunkeler, director of investments for International Paper’s pension plan, which has more than $6 billion in assets. ‘In absolute terms, -2.78% is not a good return, but it is close to market expectations,’ he says.

‘The low returns of the last two years have brought the long-term returns back down to expectations,’ he says. ‘In a way, things are more normal now than they’ve been in a long time.’

Tomorrow:  Funding Alternatives

Check out the survey results at Defined Benefit Survey 2002