A low-interest-rate environment is wreaking havoc with corporate defined benefit plans, according to a new study from Wilshire Consulting. Wilshire, based in Santa Monica, Calif., found that 94% of pension plans are underfunded.
“The $282.3 billion funding shortfall at the beginning of the year expanded to a $342.5 billion deficit,” Russ Walker, vice president, Wilshire Associates, said in a statement. “Defined benefit pension assets for S&P 500 Index companies increased by $113 billion, from $1.11 trillion to $1.22 trillion, while liabilities increased $174 billion, from $1.39 trillion to $1.56 trillion. The median corporate funded ratio is 76.9%, which represents a modest decline from 77.7% last year.”
The defined benefit plans in Wilshire’s study yielded a median 11.8% rate of return for 2012. This performance combines with the 3.6% median plan return for 2011, the 11.9% median plan return for 2010 and the 16% median plan return for 2009 to mark four consecutive years of gains for these plans after the global market dislocation events of 2007 and 2008.
The combined pension expense for the S&P 500 Index companies in the study was $57.1 billion for 2012, up from $44.7 billion a year ago. Regular annual pension expense accruals from employee service and interest expense on existing liabilities totaled $93.9 billion in 2012, 0.5% higher than the $93.5 billion a year ago.
The S&P 500 Index companies in the report contributed $57.8 billion into their defined benefit plans in 2012, an increase from the $54.4 billion contributed in 2011. Aggregate benefit payments from corporate pension plans increased somewhat during the past year. Benefit payments totaled $76.5 billion in 2012, compared with $72.5 billion during the previous year.
In related news, the Government Accountability Office recently warned that the Pension Benefit Guaranty Corp.’s financial assistance to multiemployer plans continues to increase, threatening the solvency of the fund.
Multiemployer pension plans—create by collective bargaining agreements including more than one employer—cover more than 10 million workers and retirees.
Since 2009, PBGC’s financial assistance to the plans has increased, primarily because of a growing number of plan insolvencies. PBGC estimated that the insurance fund would be exhausted in about 2 to 3 years if projected insolvencies of either of two large plans occur in the next 10 to 20 years.
More broadly, by 2017, PBGC expects the number of insolvencies to more than double, further stressing the insurance fund. PBGC officials said that financial assistance to plans that are insolvent or “are likely to become insolvent in the next 10 years” would likely exhaust the insurance fund within the next 10 to 15 years. If the insurance fund is exhausted, many retirees will see their benefits reduced to an extremely small fraction of their original value because only a reduced stream of insurance premium payments will be available to pay benefits, the office notes.
The GAO cited two policy options to avoid insolvency of the fund, as well as other options for longer-term reform. In limited circumstances, trustees should be allowed to reduce accrued benefits for plans headed toward insolvency, it said. Also, the large size of these reductions for some severely underfunded plans may warrant federal financial assistance to mitigate the impact on participants.
Read Illinois Settles SEC Fraud Charge Over Pensions on AdvisorOne.