U.S. Corporate Pension Plan Deficits Balloon To $388.8 Billion

By Cyril Tuohy

InsuranceNewsNet

The difference between assets and expected liabilities of the 100 largest U.S. corporate pension plans ballooned by $61.1 billion to $388.8 billion last year due to record low interest rates, according to a new study by Milliman Inc., a global consulting and actuarial firm.

The pension funding ratio dropped to 77.2 percent, down two percentage points from 2011, the study also found.

“Many plan sponsors made significant efforts to de-risk their pension plans in 2012, even as record-low interest rates made it an expensive time to pursue these kinds of risk management efforts,” John Ehrhardt, consulting actuary and co-author of the 2013 Pension Funding Study, said in a statement. “But there was no fighting the inevitable gravity of these low interest rates, as the 100 pension plans in our study saw a cumulative deficit increase in excess of $60 billion.”

De-risking strategies employed by pension plans last year included billions of dollars’ worth of one-time lump-sum payouts meant to lessen the volatility of pension portfolios. Last year, Ford Motor Co. offered salaried retirees and former employees the option to take their monthly pension benefit as a lump-sum payment, and General Motors revealed that it had spent $3.6 billion on pension buyouts for white-collar retirees.

Across the entire Milliman 100, de-risking by at least 15 plan sponsors resulted in a $45 billion reduction in plan liabilities, the consulting firm said. GM’s de-risking efforts dropped the company’s pension plan to second-largest based on total assets. IBM is now the largest pension plan in the Milliman 100.

Neither de-risking, nor strong investment returns, nor contributions of more than $60 billion were enough to close the deficit brought about by low rates and pension expenses. Expenses soared to $55.8 billion last year, an increase of $17.3 billion reported in 2011, the study also found.

The pension deficits are likely to continue into 2013.

“People are probably getting tired of hearing me say this, but pension funding status will continue to be tied to interest rates. If rates stay low — and all indications are that they will through 2014 — these pension plans will struggle to fill their funding gap,” Ehrhardt said.

Cyril Tuohy is a writer living in Pennsylvania. He has covered the financial services industry for more than 15 years. He has also written about food, restaurants and travel. He can be reached at Cyril.tuohy@innfeedback.com.

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Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at cyril.tuohy@innfeedback.com.