Study: 2003 Pension Contributions Predicted to Double Over 2002

April 17, 2003 ( - The last two years have exacted a substantial toll on pensions at the nation's largest companies, with many pouring in extra cash to help restore funding balance.

The survey by Milliman USA of 100 major US corporations found that pension contributions more than tripled to $33.6 billion in 2002, from $9.2 billion the year before – and contributions for this year should be at least double the 2002 level, the study predicts. Those payments aren’t something that can be put off until the end of the year: In fact, the large pensions shortfalls at many companies will trigger rules requiring them to start making quarterly payments this week, Milliman consulting actuary John Ehrhardt, told USA Today.

Not only that, but companies are also liberally using shareholder equity to help meet pension obligations. Milliman reported that among the surveyed companies after-tax charges to shareholder equity skyrocketed by more than $63 billion to $81 billion in 2002. In fact, 18 of the companies reported a charge of more than $1 billion – up from a single firm in 2001.

Companies took those steps because of how quickly corporate pension plans shrank in the wake of the struggling financial markets. Milliman said the surveyed companies went from a 124% funding ratio in 2000 to a 102% in 2001 and an 82% funding ratio last year.   The funding ratio measures how far an employer’s current assets will go towards covering projected future payments to retirees.

Assets Plummet

Milliman said the companies collectively saw a pension asset decline of $172 billion in 2002, on the heels of the $168 billion decrease in 2001. The $340-billion loss in the last two years has effectively wiped out the plans’ 1990s’ market gains, the consulting firm reported.

Not only that, but Milliman found that pension income dropped by $9 billion in 2002 – a 73%-decline from the year before. Only 35 of the companies reported 2002 pension income, down from 49 in 2001.

Also among the surveyed companies was a significant trend to lower their sights on the anticipated market returns for their plan assets. According to the Milliman study, the average expected rate of return dropped to 8.92% in 2002 from 9.31% the year before. The highest rate for 2002 was 10.5%; the lowest was 6%. Milliman predicted an average 8.5% for 2003.

Some 42 of the surveyed companies used a rate higher than 9% – which US Securities and Exchange Commission (SEC) regulators have said will be a trigger for an SEC review that will require plan administrators to further justify their actions. The higher return assumptions were a significant boost to some companies’ bottom lines, according to Milliman. If they had instead cut their return assumption to 9% mark, according to the study, they would have had to take a collective $2.6-billion charge to earnings.