It’s no secret that the last quarter of 2008 saw sharp declines in 401(k) accounts. Pension funds also saw large declines in value, despite the best efforts of actuaries to accurately predict interest and discount rates in their calculations. Not only did the drop in pension fund assets impact the funds themselves, the funded status of the plans impacts business goals and operations, as well.
“Changes in funded status are wreaking havoc with the projections companies have made,” said Alan Glickstein, senior retirement consultant at Watson Wyatt. “Large and unexpected pension contributions will require companies to divert funds they had earmarked for other business activities into their pension plans precisely when they can least afford it.”
Watson Wyatt analyzed pension data for 450 Fortune 1000 companies, and projected their pension funding status for 2008. The results indicate that, on an aggregate level, funded status will decline an average of 32 percentage points, from 106% in 2007 to 74% in 2008. This represents a total loss of $445 billion, wiping out a 2007 surplus of $78 billion, and leaving the analyzed companies with a combined $366 billion deficit on their year-end 2008 financial statements. Some companies did not yet have complete data available when the analysis was done, so actual figures, available later this spring, may vary.
“Plan sponsors are feeling the effects of a pension funding crisis with both asset values and interest rates dropping,” said Jim Shaddy, North American retirement practice leader for Watson Wyatt. “We urge Congress to respond with the appropriate temporary relief for plan sponsors.”
SEI, a global provider of outsourced asset management, reached similar conclusions based on their own polling. SEI found that companies are feeling the impact of significant pension fund shortfalls in their overall business operations. Many plan sponsors are re-evaluating their investment management, in an effort to avoid further declines.
According to the Global Quick Poll, released in February 2009, nearly 64% of the global poll participants made asset allocation policy changes in the past year, and 48% said they are moving assets away from equities. Forty-nine percent of those polled said that if their organization was required to make a cash contribution to meet their plan’s funding requirement, corporate finances would be significantly impacted.
“Following the pension ‘perfect storm’ earlier this decade, funding levels had improved but the impact of last year has once again put pensions at the top of the agenda for corporate treasury functions,” said Jon Waite, Chief Actuary for SEI’s Institutional Group. “Increased under-funding will have a substantial impact on organizational finance and from our perspective continuing ‘as is’ is not a choice. Changes will need to be more strategic and less reactive.”
SEI’s poll showed that 75% of U.S. participants said their organization has already moved plan assets out of equities and into bonds or alternatives. 72% said that required contributions before funding relief would have either significantly impacted corporate finances, or the company would not even have been able to make the payment. The seriousness of the situation was emphasized when nearly half of respondents in the United States, 46%, said it is now more likely that they will take steps toward terminating their defined benefit plan.