Milliman Funding Report: Large US Pensions Enjoy High Contributions, Increased '10 Corporate Plan Funding

(March 30, 2011) — New research by Milliman  has shown that the 100 largest corporate defined benefit pension plans in the US received a combined $59.4 billion in contributions in 2010, producing an improvement in funded status of $12.4 billion for the year.

According to Milliman’s Pension Funding Study, an annual report on the country’s largest corporate defined benefit plans, the level of contributions last year equaled almost twice the $30 billion projected at the beginning of last year. Meanwhile, the average funded ratio of the Milliman 100 was 83.9% as of December 31, compared with 81.7% in 2009 and 79.3% in 2008.

“We were surprised by the level of employer contributions, which turned a decline in funded status into an improvement in funded status,” John W. Ehrhardt, the firm’s principal, consulting actuary, and co-author of the Milliman 100 Pension Funding Index, told aiCIO. “Companies are being conservative in their projections, spurred by the combined effects of asset losses in 2008 and low interest rates that have driven pension funding requirements up, likely to continue in 2011,” he said.

The research showed that the record cash contributions and investment gains were offset by an increase in liabilities generated by a decrease in discount rates. Asset gains last year amounted to 12.8%, a $115 billion improvement from 2009. Liabilities increased 7.7% in 2010, generated by a reduction in the discount rate to 5.43% from 5.82% in 2009.

The report asserted: “Under an optimistic forecast with rising interest rates (reaching 6.51% by the end of 2012) and asset gains (12.1% annual returns), the funded ratio would climb to 107% by the end of 2012. Under a pessimistic forecast with similar interest rate and asset movements (4.31% discount rate at the end of 2012 and 4.1% annual returns), the funded ratio would decline to 71% by the end of 2012.”

Asset allocation for the Milliman 100 in 2010 was relatively unchanged. Investments in equities decreased to 44% from 45%, fixed-income remained at 36% from the year prior and alternatives increased to 20% from 19%. “Given the strong performance of the equity markets during 2010, equity allocations should have increased to over 47%…We expect equity allocations to remain at current levels or decrease during 2011 if the funded status of the study group improves,” the report stated.

Furthermore, Milliman concluded that accounting changes adopted by some companies, such as Honeywell, Verizon, and AT&T, resulted in significant charges to their 2010 year-end balance sheets. “If the rest of the Milliman 100 companies had adopted similar accounting changes, we estimate that there would have been a $342 billion charge to their cumulative balance sheets in 2010 and a reduction in their 2011 pension expense (and increase in corporate earnings) of about $19.9 billion,” the firm reported.

The accounting change cited in the report stems from the January decision by AT&T, the largest US phone company, to slash $17 billion from retained earnings, changing the way it handles accounting for its pension fund. In a regulatory filing, the telephone operator said gains and losses from its pension and other post-retirement benefits will be recognized in the year in which they are incurred instead of amortizing them over a number of years, leading to simpler, more transparent financial results and providing a better view of actual performance.

The changes indicated that AT&T is recognizing the big losses of plan assets in 2008 at one time as opposed to over two years, and it will position the company to more quickly take advantage of pension gains if interest rates continue to climb. “This is something I’ve personally wrestled with for some time,” Rick Lindner, AT&T’s chief financial officer, said on a conference call with Bloomberg. “We were bothered somewhat by the fact that there, at any given time, could be large amounts of losses that were not recognized through the income statement and had been deferred.”

“There’s an expectation that a lot of companies are going to do this, because they all have big losses from the market crash, and they all want to put it behind them,” accounting expert Robert Willens told The Canadian Press. On the whole, industry analysts said AT&T’s pension accounting change is good news for the firm’s shareholders.