Human Capital & Careers

One Giant Leap for Pension Returns

But only one small step for their funded status, thanks to by liability increases caused by lower interest rates.
Craig SchneiderApril 16, 2004

A survey of 100 of the nation’s largest defined-benefit pension plans revealed an average return on assets of nearly 20 percent in 2003.

But watch your back, Alan Greenspan. The annual survey, by consultancy Milliman, also determined that the funded status of those plans improved only slightly because the gains were offset by liability increases caused by lower interest rates.

The 19.6 percent return on assets yielded $69.9 billion more than the expected average return of 8.55 percent — which in turn was significantly higher than the average annual return of just 1.3 percent since 1999, noted the consultancy. On the other hand, said Milliman’s John Ehrhardt, “We have only regained 12 percent of the surplus assets lost over the past three years, so plan sponsors will have to continue to focus on their asset allocation and funding strategies.”

The aggregate pension deficit for the 100 plans decreased by $43 billion — 12 percent of the $371 billion in surplus assets lost during the three-year period. And while 19 companies reported assets exceeding pension liabilities at the end of 2003, compared with 12 companies in 2002, that number is still significantly fewer the 40 companies that reported surplus assets in 2001 and the 80 in 2000.

The funded ratio of plan assets to liabilities recovered at the end of 2003 to 88.5 percent for the 100 plans, from 82.3 percent for 2002. Again, however, that rebound falls far short of funded ratios of 101.8 percent for 2001, 124.4 percent for 2000, and 129.9 percent for 1999.

Employer contributions increased $22.2 billion in 2003, from $33.8 billion in 2002 (and $9.8 billion in 2001) to $56.0 billion last year. Fully $13.9 billion was attributable solely to General Motors, which has the largest defined-benefit pension fund. For 47 of the 100 surveyed companies, the increase in contributions was greater than 50 percent.

Pension expense, the charge to earnings for having a defined benefit plan for the current year, increased by $15.9 billion, creating a net expense of $12.3 billion in 2003. The prior year saw net pension income of $3.6 billion.

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