U.S. Pension Plan Funding Plunged by More than $300 Billion in 2008, Watson Wyatt Analysis Finds

Stated Target Equity Allocations for 2009 Have Not Changed Significantly 


WASHINGTON, March 11  /PRNewswire-FirstCall/ -- As news of the economic crisis continues to unfold, the first look at actual 2008 disclosures reveals substantial investment losses for the largest U.S. corporate pension plan sponsors, according to a new analysis by Watson Wyatt, a leading global consulting firm. While many of these losses are due to equity declines, equity allocation targets for 2009 have not changed substantially.

A Watson Wyatt analysis of pension disclosures for the 100 largest U.S. pension sponsors* has found that aggregate funding fell by $303 billion last year, going from an $86 billion surplus at the end of 2007 to a $217 billion deficit at the end of 2008. Overall, aggregate funding levels decreased by 30 percentage points, from 109 percent funded at the end of 2007 to 79 percent funded by the end of 2008.

"Plan sponsors were hit hard with a double whammy in 2008 with severe market declines and new funding rules coming into effect," said David Speier, senior retirement consultant at Watson Wyatt. "This combination will require employers to make staggering pension contributions over the next couple of years, at a time when they can least afford them."

According to the analysis, pension contributions increased slightly last year -- from $17.7 billion in 2007 to $18.4 billion in 2008. However, companies are expecting to make substantially larger contributions in 2009, up to more than $27.7 billion -- a 50 percent increase over 2008 cash contributions. As many firms will not need to make their required contributions until 2010, this increase can be attributed to companies' making payments now to shore up funds in anticipation of future requirements.

Pension plan assets declined by 26 percent in 2008, largely due to significant equity losses. The percentage of a plan's portfolio invested in equities had a direct relationship with investment losses in 2008 -- plans that had less than 20 percent of their portfolio in equities lost an average of 6 percent, while those with an equity allocation of 55 percent to 59.9 percent lost 23.6 percent. Those with an equity allocation of 90 percent or more lost 32.3 percent.

While stated equity targets have not declined significantly, actual equity allocations at year end were much lower. For the 83 companies that provided data, the average target equity allocation is 55 percent for 2009, compared with 58 percent for 2008. However, actual equity allocations fell over the year, to 48 percent at the end of 2008 from 59 percent the year before. Rather than a strategy shift, this reallocation was mostly due to the significant drop in the stock market -- bonds significantly outperformed equities, thereby automatically shifting funds' asset distribution. It remains to be seen whether plans will redress this imbalance.

"Many pension plan sponsors have remained committed to equity investments as they have been expected to provide the best long-term returns," said Carl Hess, global head of investment consulting at Watson Wyatt. "However, the recent financial turmoil shows that large equity positions can create substantial risks. Companies can alleviate some of this risk by adopting liability-driven investment strategies, which utilize bond and derivative markets to better hedge their long-term pension liabilities, while at the same time making sure the overall risk level in their portfolio is one they can live with."

  Other findings include:

  --  The distribution of funding ratios has significantly shifted in the
      past year. At the end of 2007, 80 percent of plan sponsors had
      realized funding levels of over 90 percent. By the end of 2008, only
      14 percent were more than 90 percent funded.
  --  The average discount rate at year-end 2008 was 6.36 percent. More than
      half (55 percent) of plan sponsors used a higher discount rate in 2008
      compared with 2007; 19 percent used the same rate assumption; and 26
      percent used a lower rate.



* Editor's note: The analysis was based on pension disclosures for the 100 largest pension plan sponsors among publicly traded companies with year-end 2008 fiscal dates, ranked by amount of plan liability at the end of 2007.

About Watson Wyatt Worldwide

Watson Wyatt (NYSE:WWNASDAQ:WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 32 countries and is located on the Web at http://www.watsonwyatt.com/. 

DATASOURCE: Watson Wyatt



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