U.S. Pension Plan Funding Plunged by More than $300 Billion in 2008, Watson Wyatt Analysis Finds
12 March 2009 - 5:29AM
PR Newswire (US)
Stated Target Equity Allocations for 2009 Have Not Changed
Significantly WASHINGTON, March 11 /PRNewswire-FirstCall/ -- As
news of the economic crisis continues to unfold, the first look at
actual 2008 disclosures reveals substantial investment losses for
the largest U.S. corporate pension plan sponsors, according to a
new analysis by Watson Wyatt, a leading global consulting firm.
While many of these losses are due to equity declines, equity
allocation targets for 2009 have not changed substantially. A
Watson Wyatt analysis of pension disclosures for the 100 largest
U.S. pension sponsors* has found that aggregate funding fell by
$303 billion last year, going from an $86 billion surplus at the
end of 2007 to a $217 billion deficit at the end of 2008. Overall,
aggregate funding levels decreased by 30 percentage points, from
109 percent funded at the end of 2007 to 79 percent funded by the
end of 2008. "Plan sponsors were hit hard with a double whammy in
2008 with severe market declines and new funding rules coming into
effect," said David Speier, senior retirement consultant at Watson
Wyatt. "This combination will require employers to make staggering
pension contributions over the next couple of years, at a time when
they can least afford them." According to the analysis, pension
contributions increased slightly last year -- from $17.7 billion in
2007 to $18.4 billion in 2008. However, companies are expecting to
make substantially larger contributions in 2009, up to more than
$27.7 billion -- a 50 percent increase over 2008 cash
contributions. As many firms will not need to make their required
contributions until 2010, this increase can be attributed to
companies' making payments now to shore up funds in anticipation of
future requirements. Pension plan assets declined by 26 percent in
2008, largely due to significant equity losses. The percentage of a
plan's portfolio invested in equities had a direct relationship
with investment losses in 2008 -- plans that had less than 20
percent of their portfolio in equities lost an average of 6
percent, while those with an equity allocation of 55 percent to
59.9 percent lost 23.6 percent. Those with an equity allocation of
90 percent or more lost 32.3 percent. While stated equity targets
have not declined significantly, actual equity allocations at year
end were much lower. For the 83 companies that provided data, the
average target equity allocation is 55 percent for 2009, compared
with 58 percent for 2008. However, actual equity allocations fell
over the year, to 48 percent at the end of 2008 from 59 percent the
year before. Rather than a strategy shift, this reallocation was
mostly due to the significant drop in the stock market -- bonds
significantly outperformed equities, thereby automatically shifting
funds' asset distribution. It remains to be seen whether plans will
redress this imbalance. "Many pension plan sponsors have remained
committed to equity investments as they have been expected to
provide the best long-term returns," said Carl Hess, global head of
investment consulting at Watson Wyatt. "However, the recent
financial turmoil shows that large equity positions can create
substantial risks. Companies can alleviate some of this risk by
adopting liability-driven investment strategies, which utilize bond
and derivative markets to better hedge their long-term pension
liabilities, while at the same time making sure the overall risk
level in their portfolio is one they can live with." Other findings
include: -- The distribution of funding ratios has significantly
shifted in the past year. At the end of 2007, 80 percent of plan
sponsors had realized funding levels of over 90 percent. By the end
of 2008, only 14 percent were more than 90 percent funded. -- The
average discount rate at year-end 2008 was 6.36 percent. More than
half (55 percent) of plan sponsors used a higher discount rate in
2008 compared with 2007; 19 percent used the same rate assumption;
and 26 percent used a lower rate. * Editor's note: The analysis was
based on pension disclosures for the 100 largest pension plan
sponsors among publicly traded companies with year-end 2008 fiscal
dates, ranked by amount of plan liability at the end of 2007. About
Watson Wyatt Worldwide Watson Wyatt (NYSE:WWNASDAQ:WW) is the
trusted business partner to the world's leading organizations on
people and financial issues. The firm's global services include:
managing the cost and effectiveness of employee benefit programs;
developing attraction, retention and reward strategies; advising
pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance
and financial services companies; and delivering related
technology, outsourcing and data services. Watson Wyatt has 7,700
associates in 32 countries and is located on the Web at
http://www.watsonwyatt.com/. DATASOURCE: Watson Wyatt CONTACT: Ed
Emerman for Watson Wyatt, +1-609-275-5162, , or Steve Arnoff,
+1-703-258-7634, Web Site: http://www.watsonwyatt.com/
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