A Greenwich press release on its 2007 U.S. Investment Management Research Study said large corporate plan sponsors – along with many public pensions – are taking radical steps to change the way they manage pension liabilities and structure fund assets motivated by the new mark-to-market accounting rules requiring plan sponsors to recognize pension funding status on the corporate income statement. The FASB has also proposed required disclosure of asset categories in which pension funds are invested based on the risks and expected long-term rate of return associated with each category (See SEI Addresses Implications of Recent Pension Disclosure Proposal ).
Forty percent of the largest corporate pension funds (those with more than $5 billion in assets) and about one-third of the largest public funds say they plan to make a significant change to their asset allocations over the next three years, the release said. However, only 8% of corporate pension funds with assets of $500 million or less say the same.
Another trend driving the restructuring among big funds is the expected out-performance of international equities and alternative asset classes relative to domestic stocks, according to Greenwich. Asset allocations of large corporate DB plans have shifted to reflect this expectation, but the investment portfolios of small plan sponsors remain heavily weighted in domestic stocks
Among corporate DB plans, allocations to domestic stocks have declined to 39.9% of total assets from more than 45% as recently as 2003, while corporate plans with less than $500 million in assets have domestic equity allocations of 47.5%. DB plan sponsors overall have increased allocations to international and global stocks to 20% of total assets from just 15.2% in 2003, but the smallest corporate funds allocate only 14.5% of assets to international/global equities.
Similarly, small corporate funds’ allocations to alternative investments lag those of large funds by a wide margin.
Despite being slow to address accounting and market changes, the health of small corporate pension plans has been improving dramatically, Greenwich found. The average funding ratio for the accumulated benefits obligations of corporate pension plans with assets of $500 million or less increased from 99% in 2005 to 106% - matching the average for all corporate funds in the most recent year. Funding ratios for small funds' projected benefit obligations improved to 100%, one percentage point higher than the corporate average.
Overall, the average blended return on investments held in defined benefit and cash balance funds increased to 14.4% in 2007 from 9.6% in 2006, compared to blended returns for small corporate pension plans which increased to 11.7% from 8.4%.
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