Dismal Markets Wipe Out Five Years of Pension Gains: Milliman

Those losses totaled over $300 billion in 2008, wiping out the entire gains from the preceding five years, according to the 9th Annual Milliman Pension Funding Study.  

According to study co-author John Ehrhardt, “Asset losses drove a decrease in funded status from about 106% at the end of 2007 to less than 80% at the end of 2008.”   The loss in funded status in 2008 is projected to produce an increase in pension expense for 2009 and a charge to corporate earnings in excess of $70 billion.  

Those losses have continued into 2009 with more than a $30 billion decrease in funded status in the first two months.   “At the end of February,” Ehrhardt observed, “the funded status of the Milliman 100 pension plans stood at 74%, the lowest level since May 2003.”

Projected Contributions

Employer contributions to the Milliman 100 pension plans increased only slightly in 2008, and the losses in funded status during 2008, coupled with the new funding requirements under the Pension Protection Act, are projected to increase required contributions to over $50 billion for 2009.  

The percentage of pension plan assets invested in equities declined from 55% to 44% during 2008. “The decrease in equity allocations is primarily due to market declines and, to a much lesser extent, a change in investment policies,” said study co-author Paul Morgan of Evaluation Associates (EAI). “A return to a 55% equity allocation by the end of 2009, either through new investments or portfolio rebalancing, would require a $100 billion investment in the equity markets,” Morgan added.

Since most of 2008’s market declines occurred in Q4, companies with calendar-year fiscal years reported the greatest impact on pension funded status, according to Milliman.  In fact, just four of the 88 firms with a calendar-year end reported their PBO-funded status to be in surplus at year-end 2008, while 50 did so in 2007, according to Milliman.  That result was comparable to that at year-end 2002,  when just eight of the companies tracked reported a surplus, according to Milliman.

Actual Returns

The average actual investment return on pension assets for the companies’ 2008 fiscal years was -18.9% (-22% for firms with calendar-year fiscal years), well below the expected return of 8.1% for the group, reversing five straight years of asset gains, according to the report.  Over the past five years, the pension funds have averaged a 4.7% actual rate of return. 

The discount rates used to measure plan liabilities increased at the end of 2008 to a median of 6.3%, continuing a trend started in 2006 (following declines in each of the prior six years).  That higher discount rate reduced pension liabilities, though that served to only slightly offset significant asset losses during 2008.  The discount rates were 6.2% in 2007, and hit a low of 5.5% in 2005, after declining icrementally each year from 7.5% since the end of 1999, according to Milliman.  The report notes that discount rates were actually 100 basis points higher as recently as mid-November 2008, and that the dramatic drop in those rates over the last six months exacerbated the drop in funding status.

Still, Milliman notes that, aided largely by measurement at higher discount rates, pension liabilities actually decreased 2.2% last year, after decreasing 0.3% in 2007.  However, the report notes that the 2007 figure was the first decrease since 1999, and contrasted sharply with the 2006 increase of 2.5% – and the peak increase of 11.8% registered in 2003.

Milliman’s Pension Funding Study is based on pension plan accounting information disclosed in the annual report footnotes of the 100 largest corporate pension plan sponsors, by assets for the 2008 fiscal year and previous years. These numbers represent the GAAP accounting information public companies are required to report under Statements of Financial Accounting Standards 87, 88, 106, and 132. They do not reflect the funded status of the companies’ U.S. qualified pension plans under ERISA.

The complete 9th Annual Milliman Pension Funding Study is available for download at http://www.milliman.com/expertise/employee-benefits/products-tools/pension-funding-study/pdfs/2009-pension-funding-study-03-01-09.pdf .