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CCH® PENSION — 04/29/10

Modest funding gains seen for large corporate plans in 2009

The financial health of the 100 largest U.S. corporate pension plans improved "modestly" in 2009, largely due to strong stock market returns, according to a new analysis by Towers Watson. The analysis found that 2009 funding levels and overall pension plan assets increased over 2008 levels, although funding for both years remained well below 2007 levels.

According to the Towers Watson analysis of year-end corporate disclosures for the 100 largest U.S. plan sponsors, aggregate funding for their U.S. pensions increased by $26.1 billion in 2009, shrinking a $209.6 billion deficit at year-end 2008 to a $183.5 billion deficit at year-end 2009. By comparison, these firms had a pension surplus of $93 billion in 2007. The overall aggregate funding ratio increased by four percentage points, from 78% funded at the end of 2008 to 82% funded at the end of 2009. By contrast, most plans were fully funded in 2007.

"Last year brought some much needed good news to pension plan sponsors as strong asset returns resulted in modest funding gains," said Alan Glickstein, senior consultant at Towers Watson. However, he added, employers are not out of the woods just yet. "Overall pension deficits remain quite large," Glickstein noted, "and employers will need to contribute significantly more into their plans over the next few years to return to full funding levels."

Improvement driven by equity market gains

According to the analysis, aggregate pension contributions nearly doubled last year --from $15.6 billion in 2008 to $30.8 billion in 2009. However, Towers Watson expects companies to make smaller contributions in 2010, approximately $19.6 billion --roughly one-third less than 2009 contributions. For many employers, higher minimum required contributions aren't due until 2011 and 2012 because of regulatory and legislative relief granted in the past year.

The analysis showed that pension plan assets increased by 12% in 2009, from $768 billion at the end of 2008 to $863 billion at the end of last year. This increase was largely due to significant gains in the equities market as well as cash contributions into the plans. In 2009, the average rate of return on plan investments was 18%, compared with an average return of minus 24% in 2008. Over the last year, most plan sponsors did not change their investment policy although some shifted to a liability-driven investment strategy to better manage their funded status, resulting in a slight shift away from equities, Towers Watson found. For the 85 companies that provided data, the average target equity allocation is 52.8% for 2010, compared with 55.1% for 2009.

"Pension plan sponsors will continue to evaluate their investment strategies in an attempt to further improve their funded position while protecting against another market downturn," said Mark Ruloff, senior consultant at Towers Watson. "Furthermore," he added, "we believe companies can alleviate some of their risks by adopting liability-driven investment strategies, which utilize matching assets --principally through bonds and the derivative markets --to better hedge their long-term pension liabilities."

Source: Towers Watson press release, April 7, 2010.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

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