Tuesday, March 29, 2011

Record US Employer Contributions In 2010

Joan E. Solsman of the Dow Jones Newswires reports in the WSJ, Large US Pensions Saw Record Sponsor Contributions In 2010-Milliman:

Large U.S. pension plans experienced record sponsor contributions last year, consulting firm Milliman Inc. reported in a study, saying a decline in discount rates fueled record levels of pension expense and cash contributions.

In its study of the 100 largest defined-benefit pension plans, Milliman said the pensions went into the year expecting to make contributions of $30.3 billion collectively, but the final number almost doubled that estimate, rising to $59.4 billion.

Funded status for 2010 "changed only modestly," Milliman said. In August, falling interest rates drove up the projected benefit obligation and resulted in the largest deficit since the firm began the annual study 11 years ago.

The plans had asset returns of 13% last year offset by a liability increase of 7.7%, and asset allocation didn't change significantly, Milliman reported.

Jerry Greisel of Business Insurance also reports, Largest pension plans' funding improved in 2010:

The funding levels of pension plans sponsored by large, publicly held U.S. employers improved slightly in 2010 due to strong investment returns and hefty contributions, according to a Milliman Inc. survey released Tuesday.

Defined benefit plans offered by 100 U.S. employers with the largest pension programs were, on average, 83.9% funded during 2010, up from 81.7% in 2009 and 79.3% in 2008, according to the survey.

Solid investment gains and increased employer contributions were responsible for the turnaround, Milliman said.

On average, plans earned 12.8% on assets last year, down slightly from 14.1% in 2009 but a huge improvement over 2008 when investment losses averaged 18.9%.

In addition, employers contributed a record $59.4 billion to their plans last year, up from $54.1 billion in 2009 and $29.8 billion in 2008.

“This was a record year for pension contributions, though the number could have exceeded $60 billion if a few things had gone differently,” John Ehrhardt, co-author of the “2011 Milliman Pension Funding Study,” said in a statement.

Pension funding relief enacted last summer helped reduce the funding burden, along with positive investment performance. If interest rates remain at current levels (or decline), contributions will be even higher in 2011,” added Mr. Ehrhardt, who is a principal and consulting actuary in Milliman’s New York office.

In all, the market value of the plans’ assets increased about $115 billion to just more than $1.2 trillion. The value of plan obligations increased nearly $103 billion to about $1.43 trillion, Milliman said.

Even with the improvement in funded status, plans’ funded ratio was the fourth-lowest since the Seattle-based actuarial consulting firm began the surveys in 1999. The lowest average funded ratio was 79.3% in 2008, when the equities markets’ slump sharply reduced the value of plan assets. The highest average funded ratio was 130% in 1999.

Finally, PR Newswire reports, Modest Increase in 2010 Funded Status as a Result of Record Employer Contributions:

Milliman, Inc., a premier global consulting and actuarial firm, today released the results of its annual Pension Funding Study, which consists of 100 of the nation's largest defined benefit pension plans. In 2011, these plans experienced asset returns of 12.8% (a $115 billion improvement) that were offset by a liability increase of 7.7% (a $103 billion increase) based on a decrease in the discount rate. The decline in discount rates fueled record levels of pension expense for these plan sponsors. Collectively, these pensions went into the year expecting a $30 billion charge to earnings, with the final number almost doubling that estimate, at $59.4 billion.

"This was a record year for pension contributions, though the number could have exceeded $60 billion if a few things had gone differently," said John Ehrhardt, co-author of the Milliman Pension Funding Study. "Pension funding relief enacted last summer helped reduce the funding burden, along with positive investment performance. If interest rates remain at current levels (or decline), contributions will be even higher in 2011."

While the funded status for the year changed only modestly, the year was marked by several significant events. In August, falling interest rates drove up the projected benefit obligation and resulted in a record deficit for the 11 year history of this study. Over the course of the year, several companies adopted new accounting approaches, which involved full or substantive recognition of accumulated losses and a larger charge to 2010 balance sheets. Had similar accounting changes been instituted across all of the companies in this study, the resultant charge would have totaled $342 billion.

Despite the eventful (and sometimes volatile) year, pension investment strategies remained relatively consistent.

"For the year, the asset allocation of these 100 pension plans did not change significantly, as investment in equities only decreased from 45% to 44%," said Paul Morgan, co-author of the Milliman Pension Funding Study. "Fixed income allocations were unchanged at 36%, but allocations to other (alternative) investments increased from 19% to 20%. On average, there were not many changes, though we did see eight of the 100 companies decrease their equity allocations by more than 10%."

You can read the Milliman analysis by clicking here. It clearly shows that large US corporate defined-benefit plans are doing modestly better but are still struggling. The study ends by looking at what to expect in 2011 and beyond, noting that "even with the improvement in funded status during 2009, 2010 and thus far in 2011, most plan sponsors will still face increases in pension expense and contribution requirements. Overall, the plan sponsors in this study group have a significant asset-liability mismatch, thereby exposing their plans to relatively high funded status and future contribution volatility." Despite the low interest rate environment, the study recommends risk management practices that adopt liability-driven investing and risk budgeting (risk allocation) techniques.

Interestingly, it is also worth noting that unlike the large US public plans, corporate plans have not been as aggressive allocating to alternative investments and some companies, like GM, are looking to “de-risk” their pension portfolio by investing less in equities and real estate, and more in fixed income assets. It makes you wonder who is going to turn out to be right over the next decade.

The other thing that caught my eye was the new accounting rules that 12 companies adopted leading them to increase allocations more than 5% to other asset classes. The study states that "the allocation increase to other asset classes was partially attributed to diversification strategies and partially attributed to changes in GAAP reporting requirements under FASB ASC Subtopic 820-10 (formerly known Statements of Financial Accounting Standards Number 157), which require significantly greater detail on asset allocation." The PR Newswire article above states that if the accounting changes been instituted across all of the companies in this study, the resultant charge would have totaled $342 billion. WOW!!! It also means that as more companies adopt these new accounting rules, they will have to increase their allocations to other asset classes. Stay tuned.

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