Milliman said the $59.4 billion far exceeded the expected level of contribution of $30.3 billion for 2010 – disclosed in the companies’ 2009 year-end footnotes.
The record cash contributions and the investment gains (12.8% actual returns for 2010 fiscal year vs. 8.0% expected returns) were offset by the 7.7% increase in liabilities generated by the decrease in discount rates (5.43% at year end 2010, down from 5.82% in 2009 and 6.36% in 2008) that are used to measure pension plan liabilities. This resulted in only a small improvement in funded ratio in 2010 to 83.9%, up from 81.7% in 2009 and 79.3% in 2008, according to the Milliman 2011 Pension Funding Study.
The continued decline in discount rates led to record levels of pension expense in 2010: a $30 billion charge to earnings (up from $25.8 billion in 2009), the highest level in the 11-year history of the study. There were 11 companies with pension income (i.e., negative expense) in 2010, down from 16 in 2009. Even with the improvement in funded status in 2010, pension expense is projected to continue to increase for 2011 as companies using asset smoothing are still reflecting the impact of the asset losses in 2008, Milliman said.
At least three companies (Honeywell, Verizon, and AT&T) adopted significant changes in their U.S. GAAP accounting in 2010 for their domestic defined benefit plans. While each company’s approach was unique, the changes involved full or substantive recognition of accumulated losses, resulting in a significant charge to their 2010 year-end balance sheet. Looking forward to 2011, there is an expected reduction of future years’ pension expense through the elimination of the annual charge to earnings for those losses.
If the rest of the Milliman 100 companies had adopted similar accounting changes, Milliman estimates that there would have been a $342 billion charge to their cumulative balance sheets in 2010 and a reduction in their 2011 pension expense (and increase in corporate earnings) of about $19.9 billion.
The study found the percentage of pension plan assets invested in equities decreased from approximately 45% to 44%, fixed income allocations were unchanged at 36%, and allocation to other investments increased from 19% to 20% during 2010. The minor increase to other asset classes reflects, in part, greater diversification of portfolios to help reduce funded status volatility.The study covers 100 U.S. public companies with the largest defined benefit pension plan assets for which a 2010 annual report (Form 10-K) was released by March 3, 2011.