Pensions: great returns in '03, but do they translate?

In its annual survey of 100 of the nation's largest defined-benefit (DB) pension plans, pension consultant Milliman found that the resounding returns of 2003 had clearly helped, but not as much as might appear at first blush. The average actual return on assets for 2003 was 19.6 percent, more than double the expected return, Milliman found. But the funded status of these plans improved only slightly, as the asset gains were offset by liability increases caused by lower interest rates.

"By any measure, this was a banner year for DB asset returns, but with continued declines in interest rates, the plans' funded status have not recovered significantly," said John Ehrhardt, Milliman consulting actuary and principal. "We have only regained 12 percent of the surplus assets lost over the past three years, so plan sponsors will have to continue to focus on their asset allocation and funding strategies."

The aggregate pension deficit for the 100 plans decreased by $43 billion, regaining 12 percent of the $371 billion in surplus assets lost over the previous three years. Some 19 out of the 100 companies were in a surplus position in 2003, with assets exceeding pension liabilities, compared to 12 the previous year. This is still significantly fewer than the 40 companies that reported surplus assets at the end of 2001 and the 80 in a surplus position at the end of 2000.

The funded ratio--the percentage of assets in the plan compared to liabilities--of the 100 plans recovered to 88.5 percent from 82.3 percent at the end of 2002. This compared with funded ratios of 101.8 percent for 2001, 124.4 percent for 2000 and 129.9 percent for 1999.

Employer contributions increased $22.2 billion, from $33.8 billion in 2002 and $9.8 billion in 2001, to $56.0 billion in 2003. A significant portion of the increase, $13.9 billion, was attributable solely to General Motors Corp. For 47 companies, the increase in contributions was greater than 50 percent.

Pension expense--the charge to corporate earnings for having a defined benefit plan for the current year--increased by $15.9 billion, creating a net expense of $12.3 billion in 2003. That figure compares with the 2002 pension income of $3.6 billion.

Some 78 percent of the companies lowered their expected rates of return in 2003, with the median expected rate of return at 8.55 percent, down from 9.25 percent in 2002 and 9.50 percent in 2001 and 2000.