The 2007 pension funded status story, as told by the Milliman 100, continued its upward trend and ended strongly in December. That was last year. The 2007 story is incomplete without including the significant losses of first quarter 2008. Here are the main points of Milliman's eighth annual study of the financial reports of 100 large U.S. corporations that sponsor defined benefit pension plans.
Pension funded status makes significant gains during 2007
Building on the gains of 2006, pension funded status improved again during 2007 though for different reasons from 2006. For the first time this century, liabilities decreased (from $1,249 billion to $1,243 billion) as the result of increases in interest rates (5.75% to 6.20%). Asset gains (actual returns of 9.9% versus expected returns of 8.3%) contributed to an increase in funded status from 99% at the end of 2006 to almost 106% at the end of 2007.
2007 gains lost in Q1 2008
Asset losses, coupled with decreasing interest rates during January 2008, reversed almost all of the 2007 gains, leaving funded status just slightly below 100% at the end of the first quarter. Funded status improved by $85 billion during 2007 but decreased by an estimated $62 billion during the first quarter of 2008.
Pension expense decreases significantly
With the asset losses of the perfect storm of 1999–2002 mostly reflected in prior years, pension expense decreased in 2007 to $19.3 billion (from $27.3 billion in 2006), increasing the earnings of the companies in our study by $8 billion. There were 16 companies with "pension income" (i.e. negative expense) in 2007 up from eight in 2006. Pension expense is expected to continue to decline into 2008.
Assets gain for fifth straight year
Actual asset returns (9.9%) exceeded expected returns (8.3%) again during 2007. Expected returns have leveled off (8.3% in 2006 and 2007) after declines in prior years. With equity allocations dropping, we expect to see future declines in expected returns.
Asset allocation shifts from equities
The percentage of pension plan assets invested in equities declined from 60% to 55.0% during 2007, a shift of almost $60 billion of assets into fixed income and other investments. This represents the impact of companies' adopting various types of liability-driven investment (LDI) strategies, which usually result in more fixed income investments with durations similar to the pension liabilities with the goal of reducing the future volatility of funded status. We expect this trend to continue into 2008.
Download the entire study at top right. Exhibits with the individual company data are available upon request.
