S&P 500 Pensions Pummeled in 2008

April 16, 2009 (PLANSPONSOR.com) - The financial health of corporate pension plans experienced a substantial setback in 2008, according to a new report.

Wilshire Consulting’s eighth study covering defined benefit plans sponsored by S&P 500 Index companies notes that defined benefit pension assets for S&P 500 Index companies declined by $310.2 billion – from $1294.3 billion to $984.1 billion – while liabilities increased $21.9 billion, from $1199.7 billion to $1221.6 billion.   As a result, the aggregate funding ratio (assets divided by liabilities) for all plans combined decreased from 107.9% to 80.6% and a $94.6 billion surplus at the beginning of the year turned into a $237.5 billion deficit.

Wilshire’s analysis of the 323 companies in the S&P 500 that maintain defined benefit plans indicates that 92% of those plans are underfunded, notably higher than the 62% reported for the previous year.   Moreover, the median (50th percentile) corporate funded ratio is 73.3%, which represents a decline from 96.6% last year.   Having said that, in view of the long-term nature of these liabilities, one should not expect full funding year in and year out.  

Regarding market volatility, the median 2008 investment return was -27.4%, following five years of rising median returns;   8.2% in 2007, 11.2% in 2006, 8.5% in 2005, 10.8% in 2004, and 17.1% in 2003.

Moreover, while the interest rates used to discount future benefits rose modestly, helping to lower

the present value of liabilities, the overall size of liabilities increased. The median discount rate rose from 6.19% to 6.25%, while total liabilities increased 1.8% for the year, according to Wilshire’s analysis.

The combined pension expense for S&P 500 Index companies was -$11.5 billion for 2008, down from +$20.2 billion a year ago. Regular annual pension expense accruals from employee service and interest expense on existing liabilities totaled $100.1 billion in 2008, 3.5% higher than the $96.7 billion a year ago.  

These companies contributed $30.0 billion into their defined benefit plans in 2008, notably higher than the $25.2 billion contributed in 2007.   Regarding distributions, aggregate benefit payments from corporate pension plans increased slightly during the past year. Benefit payments totaled $81.9 billion in 2008, compared to $78.4 billion during the previous year.

The report notes that the distribution of pension liabilities and assets of S&P 500 Index companies is relatively concentrated among the largest plans.   In fact, Wilshire notes that, as of the end of fiscal year 2008, more than half of the total pension assets and liabilities were held by the 20 and 23 largest plans when ranked by asset and liability size, respectively. Conversely, the smallest 100 plans when ranked by asset and liability size made up just 2.0% and 2.3% of the total asset and liability pool, respectively.

This is Wilshire Consulting's eighth study covering defined benefit plans sponsored by S&P500 Index companies. Wilshire's practice is to collect data onpensions from 10-K filingsfor companies in the S&P 500 Index at fiscal year-end. All data for fiscal years 2008 and 2007 are based on S&P 500 Index constituents as of year-end 2008 and, therefore, may differ slightly from the list of companies represented in earlier years.