Human Capital & Careers

The Bear Ate My Pension: $2 Trillion Worth

Congressional Budget Office estimates losses of $1 trillion, or 10 percent of assets, over four quarters. Later plunges may have doubled that.
Stephen TaubOctober 7, 2008

Pension plans in the U.S. have lost as much as $2 trillion during the current bear market, according to the nonpartisan Congressional Budget Office.

It notes that Federal Reserve data suggest the decline in the value of financial assets cost pension funds roughly $1 trillion — almost 10 percent of their assets — from the second quarter of 2007 to the second quarter of 2008, the latest period for which data are available.

Given the significant further drop in asset prices since the end of the second quarter, “it is plausible that the cumulative decline in pension assets over the past year and a half amounts to about $2 trillion,” says CBO director Peter Orszag in a blog detailing his Tuesday testimony before the House Committee on Education and Labor.

The CBO estimates the value of the assets held by defined-benefit plans has declined by roughly 15 percent over the past year. Of course, in a defined-benefit pension plan, benefits are specified by a fixed formula unrelated to the value of the pension fund. However, companies still must be concerned about the adequacy of the pension plan’s funding — the relationship between its assets and liabilities.

Because of the way the obligations of plans are calculated, their funding positions are also affected by the level of interest rates. Those rates have increased over the past year, lowering the discounted value of plans’ liabilities by roughly 5 percent to 10 percent and partially offsetting the drop in asset values, Orszag notes.

Overall, the CBO estimates defined-benefit plans’ assets, net of liabilities, may have decreased by 5 percent to 10 percent over the past year.

The CBO is one among a number of groups to estimate the funding level of pension funds in recent days.

Also today, consulting firm Mercer reported that the overall plan ratio was 104 percent at the end of 2007, but fell to 97 percent at the end of the third quarter. As a result, the $60 billion surplus at the end of 2007 has turned into a deficit of $35 billion. It analyzed S&P 1500 companies.

Earlier this week, a separate Merrill Lynch study found that the average funded status of pension plans for U.S.-based S&P-500 companies fell to 92 percent from 99 percent at the beginning of the year.

Individuals in defined-contribution pension plans are more at risk since they absorb all of the losses incurred.

What’s more, defined-contribution plans apparently are more heavily weighted toward stocks than defined-benefit plans are, according to the CBO.

Over two-thirds of the assets in defined-contribution plans are invested in equities–either directly or through mutual funds. Because of that heavy emphasis on equities, the value of assets in defined-contribution plans may have declined by slightly more than that of assets in defined-benefit plans, the CBO warned.