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Low interest rates equal high pension funding deficits

January 22nd, 2013 No comments

News that AT&T recorded a $10 billion fourth-quarter charge for its pension plan emphasizes the trouble many companies are having funding pensions. In this FOX Business article, John Ehrhardt discusses how historically low interest rates have hindered the funding status of the nation’s largest 100 corporate defined benefit plans. The result was the largest year-end funding deficit in the 12 years Milliman has analyzed these pension plans.

Here is an excerpt from the article:

Historically low rates have deepened the pension funding deficit in record amounts for these plans in 2012, Milliman says, with the top 100 US-based plans on average funded just 76.4% as of the end of last year – [down from 78.7% at the beginning of 2012].

Telecom giant AT&T has already warned in an SEC filing it would book a $10 billion charge for the fourth quarter due to its pension- and retirement-benefit plans, and Verizon (VZ) has warned it may book charges in the last quarter of 2012 as well due to its pensions.

A year of ballooning pension shortfalls has the 100 plans’ deficit now at $411.8 billion, $74 billion higher than it was as of year-end 2011.

That’s the largest annual funding deficit in the dozen years Milliman has conducted this analysis.

And that shortfall comes even though the plans had a decent year of returns on assets largely due to improving equities, posting a $90 billion gain, or a return of 9.3%, Milliman says.

The shortfall came from the liability side of the balance sheet, as low interest rates created a $164.8 billion increase in the plans’ pension benefit obligations, Milliman’s John Ehrhardt, co-author of the study, says.

“People may be getting tired of hearing me saying it but interest rates have been the story for the last four years and that’s not going to change in 2013,” Ehrhardt said in a statement.

Even though these 100 corporate pension plans have beaten their expected returns on assets for three of the last four years, Milliman’s John adds, the liability losses from plunging interest rates more than offset the investment gains. The companies book the deficit as a charge against shareholder equity on their balance sheets.

To read Milliman’s latest Pension Funding Index, click here.

Fiscal responsibility and the impact on the private pension system

December 13th, 2010 No comments

Gerald Erickson

Paraphrasing the Greek philosopher Heraclitus, “Change is constant.” Those of us involved in the retirement industry together with our clients have witnessed such constant change in the form of new legislation and regulations coming at a furious pace. Much of this legislation is intended to help employees achieve a more secure retirement, but that does not mean all of the change has been positive.

Now a national debate is beginning that has the potential to impact the private pension system. This debate will focus on the exploding federal debt and on options for improving fiscal responsibility. One step in this process has been the formation of the National Commission on Fiscal Responsibility and Reform, a bipartisan coalition led by Alan Simpson and Erskine Bowles.

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