Human Capital & Careers

Pension Funding Ratios in a Plunging Mode

The typical U.S. plan had its funded status fall 31.5 percentage points in 2008, largely due to steep drops in November and December, BNY Mellon re...
Stephen TaubJanuary 7, 2009

Funding ratios among corporate pension plans have entered a period of sharp declines — sliding more than 11 percentage points in December and 13 points in November — according to BNY Mellon Asset Management.

Largely because of that two month plunge, the funded status of the typical U.S. corporate plan fell 31.5 percentage points in 2008.

BNY Mellon said that the back-to-back double-digit declines in the last two months of 2008 resulted primarily from falling rates of longer-term high grade corporate bonds. “The Fed’s drive to bring down interest rates to help the economy has had the collateral effect of increasing the liabilities of typical U.S. corporate pension plans,” said Peter Austin, executive director of BNY Mellon Pension Services. He said that liabilities rose 20.3 percent in December, as corporate bond yields dropped by 125 basis points.

The news was not all bad. A year-end stock market rally boosted asset returns by 3.2 percent in December. However, the combination of falling stock prices and rising liabilities throughout 2008 resulted in one of the worst years in memory, BNY noted, evoking memories of the troubled period from 2001 to 2003.

Looking into 2009, Austin said that market sentiment pointed toward an increase in Treasury yields during the year. “We also see a continued narrowing of corporate spreads, led by the demand of plan sponsors to use long corporate bonds as a pension liability hedge,” he added.

As reported earlier, a coalition of large companies that still offer defined-benefit plans is seeking a suspension or delay of new rules that would further drain them of much-needed cash. The Pension Protection Act of 2006, passed after funding dropped following the technology and internet collapse in 2001, requires companies to cover 94 percent of retirement-plan liabilities to be considered fully funded in 2009.

Supporters of a delay in the law’s timetable, though, say that a large number of companies are likely to fall short of that funding level.

“There is certainly serious concern that the effects of doing nothing [about the law] will have a huge negative impact on companies, and lead to significant extra expenses at a time when credit is so tight,” Judy Schub, managing director of the Committee on Investment of Employee Benefit Assets, told CIEBA, a pension-plan trade group that is part of the Association for Financial Professionals, is supporting an effort that Schub says is being led by the American Benefits Council, a national trade association for companies concerned about federal legislation and regulations. “We are all working to encourage Congress to act quickly,” she said.

The ABC issued a 10-point plan in October detailing addressing threats to employer-sponsored plans.

A year ago, the requirement to cover 94 percent of plan liabilities didn’t seem like much of a problem, given that plans covered 104 percent of obligations and posted a $60 billion surplus at the end of 2007, according to an earlier Bloomberg article, citing the Mercer pension consulting unit of Marsh & McLennan Cos.