Corporate US plans expect too much

US corporate defined-benefit plans are still severely underfunded, with an artificially high return expectation contributing to the situation, according to a report of the funding status of 308 US corporate defined benefit plans by Wilshire Consulting.

While the funding status of the funds has increased in the past year, from 80.2 to 83.4 per cent, more than 90 of the corporate pension plans remain underfunded.

The slight improvement was due to a vast improvement in pension fund performance, with the median 2009 investment return of 16.2 per cent representing a stark rebound from the -27.4 per cent median return of 2008.

The survey measured the funding status, and investment profile, of 308 companies in the S&P500 index that maintain defined benefit plans. In the year the combined assets increased from $883 billion to $992.9 billion, while the liabilities increased from $1,101.5 billion to $1,191.2 billion.

Although the median expected return on plan assets’ assumptions has fallen during the past nine years, from 9.5 per cent in 2000 to 8 per cent in 2009, the report quotes that many pension accounting critics believe this assumption is still too high.

Wilshire Consulting’s long-term forecast for the return on corporate pension plans is will below this, at about 6.4 per cent, based on the average asset allocation of the corporate pension plans.

The average asset allocation of these plans was: 54.1 per cent in total equities; 34 per cent in total fixed income; 1.7 per cent in real estate; 1.4 per cent in private equity; 0.8 per cent in hedge funds; and 8 per cent in other including cash.