Wilshire: 2002 'Worst Year Ever' for Private-Sector Pensions

May 14, 2003 (PLANSPONSOR.com) - The drumbeat of bad pension news continued with word from a consulting firm that corporate pension plans suffered their worst year ever in 2002 as they were battered by the effects of a bear market and falling interest rates.

According to the Wilshire Associates 2003 Corporate Funding Survey on Pensions, defined benefit pension assets for S&P 500 companies dropped $106 billion to $892 billion while liabilities increased $105 billion to $1.07 trillion. In addition, nearly nine out of 10, or 89%, of corporate pension plans are now underfunded. The aggregate funding ratio for all plans fell to 83% last year from 104% the year before while the plans dropped to a $177-billion deficit in 2002 from a $34 billion surplus.

The survey found that the median investment return in 2002 was negative 9%, causing pension assets to fall. In addition, declining interest rates forced companies to increase the value of their pension liabilities. The median discount rate used to value liabilities dropped to 6.75% from 7.25%, which led to an additional 6% increase in reported pension liabilities. In total, liabilities increased 11% for the year, according to the study.

Only 36 of the 320 corporations studied, or 11%, have pension assets that equal or exceed liabilities. That is down sharply from years 2001 and 2000 when 36% and 71%, respectively, of corporations had pension assets at or above liabilities.

Contributions by S&P 500 companies into their defined benefit plans increased almost fourfold to $41 billion in 2002 from $12 billion in 2001.   “…Now, more and more companies are facing the reality that significant corporate resources might have to be diverted to pay for defined benefit plans,” said Stephen Nesbitt, a Wilshire managing director and author of the study.

Many in the pension industry have complained that studies such as those done by Wilshire of both government and private pensions (See  Wilshire: Public Pension Landscape Still Bleak  ) don’t adequately take into account that pension funding is designed to be viewed over the long term with much of their liabilities not becoming due for many years (See   State Pension Group: Wilshire Research ‘Alarmist’ ).