In 2003, defined benefit assets grew $139 billion to $1.03 trillion, outpacing liabilities, which increased on $85 billion to $1.15 trillion. Thus, the $177 billion aggregate deficit recorded at the beginning of the year was whittled down to $123 billion, according to Wilshire Associates’ 2004 Corporate Funding Survey on Pensions.
Wilshire, though, points out that themedian corporate funding ratio has declined steadily from 120% at the end of 1999 – the height of the bull market – to 78% at the end of 2002, now improving to 82% at the end of 2003.
Offering a different take on this decline though is John Ehrhardt, a consulting actuary and principal in the New York office of Milliman USA. During his firm’s presentation of its fourth annual survey of defined benefit plans at the 100 largest U.S. corporations, Ehrhardt said the “heady gains of the 1990s created this image of pension plans that cost nothing,” which he categorized as not “really reality.” It is in the latest results that Ehrhardt and Milliman find more of a move toward reality in an average funding ratio of 88.5%, which improved from last year’s 82.3%. “A 90% target ratio is really fine,” Ehrhardt said (See Milliman: Pension Assets Up 19.6% in 2003 ).
Pension assets at S&P 500 companies were boosted by three factors in 2003, Wilshire found. One, the median 2003 investment return was 17.1%, a significant improvement from 2002’s negative 9% return (See Wilshire: 2002 ‘Worst Year Ever’ for Private-Sector Pensions ). Two, contributions in defined benefits plans increased to $65 billion in 2003 from $40.6 billion in the previous year. Speaking to defined benefit payments though, Wilshire points out that a significant portion of the increase – $18.6 billion – was attributable solely to General Motors (GM).
The third item padding the pension bottom line for S&P 500 companies in 2003 was that benefit outflows from corporate pension plans remained flat during the past year. Benefit payments totaled $77 billion in 2003, up only slightly from $76 billion in 2002. At the same time, benefit payouts total 7.5% of current assets, down from 8.5% in the previous year, a decrease Wilshire attributes to the increase in current assets over 2002.
With the marked improvement across defined benefit schemes in 2002, Wilshire calculates only 81% of corporate pension plans are now underfunded, down from 89% in the previous year. However, the median corporate funded ratio is 82%, up from 78% a year ago. Part of the reason for the rise in the median funded ratio may be attributed to falling interest rates forcing companies to increase the value of their pension liabilities. The median discount rate used to value liabilities fell from 6.75% to 6.25%, causing an additional 6% increase in reported pension liabilities. Liabilities, in total, increased 8% for the year.
Additionally, the combined pension expense was $24 billion in 2003, up from zero a year ago. Regular annual pension expense accruals from employee service and interest expense on existing liabilities totaled $94 billion in 2003, slightly higher than the $91 billion a year ago.
Data presented is the fourth study conducted by Wilshire covering defined benefit plans sponsored by S&P 500 companies. Wilshire says its practice is to collect data on pensions from 10K filings for companies in the S&P 500 at fiscal year end. The data for 2004’s report is from 331 companies in the S&P 500 Index that maintain defined benefit plans.
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