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Financial Health of Corporate Pension Plans Slips After Two Years of Improvement According to Wilshire Consulting Study

The financial health of corporate pension plans, as measured by the aggregate funding ratio, slipped somewhat after two years of improvement, according to Wilshire Associates Incorporated (“Wilshire®”), a diversified global financial services firm, which surveyed 316 companies in the S&P 500 Index that maintain defined benefit plans.

The percent of corporate pension plans that were underfunded in 2011 is 94 percent, according to the study completed by the Investment Research Group of Wilshire Consulting. This is somewhat higher than the 92 percent reported for the previous year. The median corporate funded ratio is 78.1 percent, which represents a decline from 81.8 percent last year. Eighteen of the 316 corporations, or 5.7 percent, have pension assets that equal or exceed liabilities, the study concludes. In comparison, 25 of the 316 corporations’ DB plans, or 7.9 percent, were fully-funded or running a surplus at year-end 2010.

"Last year marked a reversal in accounting measurements of the financial health of corporate pension plans, as lower interest rates brought on markedly lower discount rates and, as a result, higher pension liabilities," said Russ Walker, vice president, Wilshire Associates and a member of the Investment Research Group of Wilshire Consulting.

"The challenging investment environment during the year also factored into plan funding status,” he continued. “Defined benefit pension assets for S&P 500 Index companies increased by $48.2 billion, from $1,080.4 billion to $1,128.6 billion, while liabilities increased $142.5 billion, from $1273.0 billion to $1,415.5 billion. As a result, the aggregate funding ratio -- assets divided by liabilities -- for all plans combined decreased from 84.9 percent to 79.7 percent and the -$192.6 billion funding shortfall at the beginning of the year expanded to a -$286.9 billion deficit," he noted.

"While the aggregated pool of S&P 500 Index defined benefit plans is only 79.7 percent funded this year, the concentration of assets and liabilities within this set of plans indicates that a relatively small sub-set of plans has an overwhelming impact on the entire pool of plans," Walker said. "The largest 25 plans when ranked by assets and liabilities represent 48.7 percent and 48.6 percent of assets and liabilities, respectively, of the 316 total plans. The median funded ratios stand at 80.9 percent and 76.7 percent for the 25 largest and 100 smallest plans, respectively.

"The defined benefit plans in the Wilshire Consulting study yielded a median 3.8 percent rate of return for 2011," Walker noted. "This rather lackluster performance, compared to the 12.0 percent median plan return for 2010 and the 16.2 percent median plan return for 2009, reflects the challenges investors experienced in capital markets in 2011, especially in the volatile global stock markets. However, 2011 marked the third consecutive year of gains for these plans after the global market dislocation events of 2007 and 2008."

According to the Wilshire study, interest rates used to discount future benefits fell during 2011, contributing to the overall increase in pension liabilities for the year. The median discount rate fell from 5.50 percent to 5.01 percent, while total liabilities increased 11.2 percent for the year.

The combined pension expense for the S&P 500 Index companies in the study was $45.8 billion for 2011, up from $33.8 billion a year ago. Regular annual pension expense accruals from employee service and interest expense on existing liabilities totaled $95.1 billion in 2011, 3.6 percent higher than the $91.7 billion a year ago. The S&P 500 Index companies in the study contributed $54.9 billion into their defined benefit plans in 2011, a decrease from the $57.9 billion contributed in 2010.Aggregate benefit payments from corporate pension plans increased somewhat during the past year. Benefit payments totaled $74.0 billion in 2011, compared to $71.3 billion during the previous year.

This is Wilshire Consulting’s ninth study covering defined benefit plans sponsored by S&P 500 Index companies. Wilshire’s practice is to collect data on U.S. pensions from 10-K filings for companies in the S&P 500 Index at fiscal year-end. The data does not include DB plans for offshore-based employees, if the 10K clearly reports them separately. Additionally, the study does not include data on non-qualified/OPEBs/any other postretirement benefit plans. All data for fiscal years 2011 and 2010 are based on S&P 500 Index constituents as of year-end 2011 and, therefore, may differ slightly from the list of companies represented in earlier years.