Markets Narrow S&P 500 Pension Funding Gap

According a new report by S&P Indices, the underfunding position in S&P 500 pensions improved slightly to a $245 billion shortfall, compared with $261 billion in 2009, despite the boost from a 12.4% global market rebound.  Additionally, according to the report, “S&P 500 2010: Pensions and Other Post Employment Benefits (OPEB)“, OPEB remains severely underfunded at $210 billion.

The report notes that the pension funding rate increased to 83.9% from 81.7%, the discount rate declined to 5.31% from 5.81%, increasing projected obligations, and the expected return rate declined to 7.73% from 7.83% the year previously. 

“Even with a 15% equity return and a market recovery of over 45% over the past two years, S&P 500 companies still could not put a dent into the pension underfunding situation,” says Howard Silverblatt, S&P Senior Index Analyst and author of the report. “However, there is a faint light at the end of this tunnel. Because of the record recovery in 2010, companies are currently in much better shape to handle corporate pensions – now considered an acceptable and manageable expense well within their income and assets levels.”

The S&P Indices report also reviewed the status of Other Post Employment Benefits (OPEB). Within the S&P 500, 296 companies offered OPEBs in 2010. With $274.1 billion in OPEB obligations, only $64.5 billion was funded. While OPEB funding levels have increased in recent years, its funding status (23.53%) still pales in comparison to that of pensions (83.9%), according to the report.

Combined, the amount of assets that S&P 500 companies set aside in 2010 to fund pensions and OPEBs amounted to $1.34 trillion, covering $1.79 trillion in obligations with the resulting underfunding equating to $ 455.1 billion, or a 25.5% funding rate.  

The report notes that corporate contributions were again “much larger than expected”, with $68.4 billion in 2010, more than twice the $33.2 billion anticipated for that year. S&P Indices noted that the same scenario occurred in 2009, with $ 66.1 billion contributed, compared to the expectation of $38.7 billion.  “The additional contributions were in stark contrast to the prior contributions, which averaged $ 36.7 billion over the prior nine years,” according to the report, which went on to note that for 2011 companies have increased their anticipated contribution to $ 41.1 billion – a number that the report says, based on the market’s year-to-date performance, should be sufficient.  “However, markets change,” it cautions.

The report notes that OPEB underfunding remains “massive”, even as underfunding was reduced to $210 billion from $ 215 billion.  The report noted that only four companies are fully overfunded.

However, the report notes that S&P 500 pension costs have now “become a reasonably-controlled expense to corporations, with costs and outflows fitting well within income and assets levels, as well as, cash-flow”.  S&P Indices however, believes that the current state of the regulated pension system “includes archaic accounting regulations that distort the financial position of pension funds and their sponsors, in addition to, a pay-as-you-go OPEB system with very little funding or legal guarantees”. 

The report’s authors predicted that the shift to defined contribution designs will result in a “legacy program which over the next several decades will mostly work its way out of the last bastions of the U.S. labor market, and out of existence”.