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CCH® PENSION AND BENEFITS — 04/07/09

Milliman Finds Record Losses In Pension Funded Status During 2008

from Spencer’s Benefits Reports: The ongoing financial crisis drove the 100 largest corporate pension plans to a record $300 billion loss of funded status in 2008, according to research recently conducted by Milliman. This was Milliman’s ninth annual study of the financial reports of the 100 U.S. public corporations that sponsor the largest defined benefit plans. As a group, these companies had pension plan assets of more than $900 billion at the end of 2008.

Milliman found that asset losses fueled a decrease in funded status from about 106% at the end of 2007 to less than 80% at the end of 2008. Losses continued into 2009, with a $30 billion decrease in funded status in the first two months of this year. At the end of February 2009, the funded status of these 100 pension plans was 74%, the lowest level since May 2003.

Actual asset returns (which were -18.9% for 2008 fiscal years) were below the expected returns (8.1%) after five straight years of asset gains. Asset values dropped to $833 billion by the end of February 2009, to levels not seen since July 2003. Expected returns have remained fairly level (8.1% in 2008 and 8.3% in both 2007 and 2006), but those returns might decline in 2009 because of reductions in asset allocation to equities.

Milliman further found that pension expense again declined in 2008, but will increase significantly in 2009. Reflecting the gains in funded status over the five prior years, pension expense decreased in 2008 to $10.4 billion (from $18.9 billion in 2007), the lowest level since 2002. There were 25 companies with pension income (i.e., negative expense) in 2008, up from 21 in 2007. However, the loss in funded status in 2008 is projected to produce an increase in pension expense for 2009 (and a charge to corporate earnings) in excess of $70 billion.

Furthermore, the study noted that pension plan contributions are projected to increase significantly in 2009 and thereafter. Contributions to the 100 pension plans studied increased only slightly in 2008 ($29.7 billion versus $27.2 billion in 2007). However, the losses in funded status during 2008, coupled with the new funding requirements enacted by the Pension Protection Act of 2006, are projected to increase required contributions to more than $50 billion for 2009. Many companies are expected to defer some of the increased contribution requirement to 2010, increasing contributions in that year to what might be record levels.

According to Milliman, the percentage of pension plan assets invested in equities declined from 55% to 44% during 2008. The decrease in equity allocations is primarily because of market declines and, to a much lesser extent, a change in investment policies. A return to a 55% equity allocation by the end of 2009 (through new investments or portfolio rebalancing) would require a $100 billion investment in the equity markets.

The study found that the funded status of the 100 pension plans decreased significantly during 2008, falling below 80%. The aggregate pension deficit (i.e., unfunded projected benefit obligation) increased by $320 billion during the 2008 fiscal years, reversing a $65 billion surplus at the end of 2007 and producing an aggregate pension shortfall of $255 billion as of the end of the companies’ 2008 fiscal years.

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