Closing the negative gap
between pension benefit obligations (PBOs) and assets remained
illusive for large US companies in 2010 despite help from rising
equity prices and hefty contributions, a study by Towers Watson has
revealed.
The consultancy based its
conclusion on an analysis of pension data for the 100 publicly
traded domestic companies with the largest PBOs which in aggregate
ended 2010 at $1.0985trn compared with aggregate assets of
$926.6bn.
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This left a funding deficit
of $172.2bn (15.7%) which, although an improvement on the $181.8bn
(17.7%) at the end of 2009, was still well below the $94.6bn
(10.2%) surplus recorded at the end of 2007.
“Employer contributions
helped the funded status of many pension plans in 2010,” said Mike
Archer, a senior retirement consultant at Towers Watson.
“However, historically low
interest rates translated to lower discount rates, which
significantly increased plan liabilities.”
Specifically, Towers Watson
found that the 100 companies pumped a total of $40.5bn into their
pension plans in 2010, up from $30bn in 2009.
Working against the companies
in 2010 was a 46-basis-point decline in discount rates (from 6.39%
to 5.92%) from the end of 2009 to the end of 2010. At the end of
2010, the average discount rate for these plan sponsors was
5.46%.
In addition, Towers Watson
noted that corporate bond yields, which are important in
calculating contribution requirements and financial statement costs
related to pension plans, have declined significantly over
time.
For example, the Merrill
Lynch 10+ High Quality Index yield, a benchmark for high-quality
long duration corporate bond yields, declined from 9.39% at the end
of 1990 to 5.34% at the end of 2010.
“Sponsors are recognising
that changes in interest rates influence the level of benefits paid
from their plans in unintended ways and are starting to address
these issues,” said Mark Ruloff, director of asset allocation at
Towers Watson Investment Services.
“Employers are also
revisiting other facets of their overall strategy, from accounting
methods and assumption-setting processes to the implementation
approach for liability-driven investment strategies,” he
added.
On the outlook for 2011 and
beyond, Archer concluded that it is uncertain.
“While we anticipate further
improvement this year, largely due to employer contributions, the
path to full funding is likely to be a long one,” he
stressed.
Archer added that barring a significant capital market
recovery or a big increase in interest rates, will mean employers
will have to contribute even more to meet expected increases in
minimum required contributions and to eliminate the funding
shortfalls of the past few years.
