Desperate times for US corporate plans

Investments of more than $100 billion are required to rebalance the equity allocations of the largest US corporate defined benefit plans, as they join their international peers, registering record losses for 2008 and pushing them deep into underfunded territory.

Milliman’s Pension Funding Study showed that due to market declines, the percentage of corporate pension plan assets invested in equities declined from 55 to 44 per cent during 2008.

According to the study’s co-author, Paul Morgan of Evaluation Associates, a Milliman company, a return to a 55 per cent equity allocation by the end of 2009 – either through new investments or portfolio rebalancing – would require a $100 billion investment in the equity markets.

Results from this study, Milliman’s ninth, show the US’s largest corporate defined benefit retirement plans registered record losses, of more than $300 billion in 2008, wiping out the entire gains from the preceding five years.

According to the study’s other co-author, John Ehrhardt, asset losses drove a decrease in funded status from about 106 per cent at the end of 2007 to less than 80 per cent at the end of 2008.

“Losses continued into 2009 with more than a $30 billion decrease in funded status in the first two months of this year. At the end of February, the funded status of the Milliman 100 pension plans stood at 74 per cent, the lowest level since May 2003,” he said.

The losses in funded status during 2008, coupled with the new funding requirements under the Pension Protection Act, are projected to increase required contributions to more than $50 billion for 2009.