Most of the nation’s largest pension plans kept themselves out of trouble last year, according to a recent analysis of 10-K filings by Towers Watson, but many still face substantial underfunding after the 2008 market meltdown.
According to the analysis, aggregate pension contributions for the 100 largest plans nearly doubled last year, from $15.6 billion in 2008 to $30.8 billion in 2009. Those contributions, combined with an average 18% return on plan investments, helped push those plans to an average funding ratio of 81% at the end of last year, compared with 75% at year-end 2008. Only 17% of plan sponsors had funding ratios below 70%, compared with 41% the year earlier.
“It looks like plan sponsors put in more than the minimum contributions, probably enough to avoid the benefit restriction provisions in the Pension Protection Act of 2006,” notes Mark Ruloff, director of asset allocation for Towers Watson. Under the PPA, companies start to face restrictions on their funds, such as constraints on the ability to offer retirees lump-sum payouts, if their funding level dips below 80%. If their funding level falls below 60%, companies must stop accruing new benefits for the participants until the level improves.
Liabilities also increased in 2009, due to lower discount rates used to calculate them. (The average discount rate last year was 5.92%, compared with 6.38% in 2008.) At year-end the largest plans had an aggregate deficit of $183.5 billion, compared with a deficit of $209.6 billion in 2008.
Companies report that they expect to reduce their pension contributions by about one-third in 2010, according to the Towers Watson research, with a projected $19.6 billion earmarked for the plans. However, PPA requirements that plans be 100% funded will likely mean much higher cash outlays in 2011 and 2012.
“We’re looking at a doubling, tripling, or even quadrupling of contributions from already-high levels going into 2011 and 2012, absent something miraculous happening in the market,” says Alan Glickstein, senior consultant at Towers Watson.
Regulatory relief in the form of an extension to the seven years that companies currently have to make up funding shortfalls would also be a potential help. The Senate passed a bill earlier this month that would allow employers two options along those lines, but the House of Representatives has yet to act on it. Extending the time frame “would probably still result in higher contributions than in the past, but they would not rise as dramatically as they would otherwise,” says Glickstein.
An analysis of the asset mix of the largest pension sponsors showed only a slight shift away from equities, with the average target equity allocation at 52.8% for 2010, down from 55.1% in 2009. That’s reflective of many large sponsors having already moved to a liability-driven strategy, in which assets are more heavily focused on fixed-income vehicles.
Ruloff says he expects the trend away from equities toward fixed income to continue, as more companies freeze or close their plans and have less of a need for “excess returns to cover growing accruals.” He is also urging companies to take a proactive approach to likely changes in pension-accounting rules that would increase the level of equity-related volatility that needs to be reflected in plan valuations.
“The pace of change may be slower than what we’ve seen in recent years,” he says, “but the shift away from equities could move at 5% a year for many years in the future.”