Research Notes Tough Year for Pension Funding

August 19, 2008 ( - The year 2008 has not been kind to pension portfolios.

A new estimate by the Credit Suisse Equity Research unit indicated that the funded status of the S&P 500 companies’ pension plans may have fallen by $170 billion so far this year, from $60 billion overfunded at the end of 2007 to $110 billion underfunded.

The researchers said they found 27 companies where the estimated drop in the plans funded status this year is more than 5% of the company’s market cap.

According to the report, pension plan asset allocations changed during 2007 with the most significant trend being a shift in the allocations away from equities toward fixed income and the asset category (hedge funds, private equity, commodities, etc.).

There were 219 companies that reduced their allocation to equities, 210 companies increased their allocation to fixed income, and 141 companies increased their allocation to other assets.

Whether a pension plan’s health improves or deteriorates depends upon how the plan assets match up against the pension obligation. “For many plans there is a large asset-liability mismatch: Do the companies have any expertise in managing those risks? Are investors willing to pay for companies to take on those types of risk?” Credit Suisse wondered.

Credit Suisse also reported that the average pension allocation for S&P 500 companies is a 55% allocation to equities, 33% to fixed income, 4% to real estate, and 8% to other asset classes for 2007 as compared with 61%, 29%, 4%, and 6% respectively in 2006.

The most significant trend in pension asset allocation was a reduction in the allocation to equities, with 219 companies reducing their equities allocation. For 47 companies it remained the same, and 95 companies actually increased the allocation to equities.

There were 210 companies that increased their allocation to fixed income; including 52 companies where it jumped by more than 5% and 141 companies that increased their allocation to the "other" asset category.