Bloomberg News

Company Pension Deficit Jumps Most Ever as Stocks, Yields Plunge

October 06, 2011

Oct. 6 (Bloomberg) -- Company pensions in the U.S. fell behind future payouts to retirees by the most ever in September, as stocks fell and the slowing economy and Federal Reserve policy drove down bond yields, according to actuarial and consulting firm Milliman Inc.

The deficit between the assets of the 100 largest company pensions and projected liabilities widened by a record $124 billion in September to $439 billion, Seattle-based Milliman said today in a statement, based on data going back to 2000. Investment assets fell $31 billion to $1.175 trillion, while obligations to retirees rose $93 billion to $1.614 trillion.

“We’ve been talking about how interest rates are driving pension funded status for several years now,” John Ehrhardt, a principal and consulting actuary in New York with Milliman, wrote Oct. 5 in an e-mail. “The perfect storm has been brewing all summer. In September the storm arrived with a vengeance.”

Company pensions have suffered as bond yields, a benchmark in determining future liabilities, have been tamped down by the U.S. central bank’s efforts to ward off another recession as markets are buffeted by Europe’s debt crisis.

Companies have assumed a 7.75 percent median long-term rate of return on their assets, according to investment advisory firm CT Capital LLC, which tracks 1,423 corporations. This year the Standard & Poor’s 500 Index has lost 7.6 percent, U.S. corporate bonds have gained 4.9 percent as of Oct. 5, while Treasuries have returned 9 percent, according to Bank of America Merrill Lynch index data.

No Relief

“Given the Fed’s declaration that rates are going to remain low as far as the eye can see, a corporate board certainly can’t hope for anyone to ride to the rescue on that metric,” said Kenneth Hackel, president of CT Capital in Alpine, New Jersey, said Oct. 5 in a telephone interview. “Unless you think stocks are going to start rising by double digits per year for the next five years, then companies are going to have to fess up to these large liabilities.”

Yields on 10-year Treasuries touched 1.67 percent, the lowest ever, on Sept. 23. Interest rates have declined as the Fed has kept its target rate for overnight loans between banks at a record low since December 2008. In August, the central bank promised to keep its target rate for overnight loans between banks near zero through mid-2013.

Leading indicators show the world’s largest is falling into another recession, according to the Economic Cycle Research Institute. “You have wildfire among the leading indicators across the board, Lakshman Achuthan, the group’s chief operations officer in New York, said in a radio interview Sept. 30 on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Asset Rules

The Pension Protection Act of 2006 requires companies to increase pension-fund assets gradually to put them on firmer financial footing, reducing the chances the government will have to rescue them. As bond yields decline, corporate pensions must set aside more money to cover future obligations to retirees.

AA company debt yields were 3.22 percent, after falling to 2.72 percent on Aug. 4, the lowest since October 2010, according to Bank of America Merrill Lynch index data.

Company pension plans are shifting away from U.S. stocks, with 38 percent expecting to reduce holdings this year after the same percentage did so in 2010, according to a survey by consulting firm Aon Hewitt in Lincolnshire, Illinois, of 227 U.S. employers with $389 billion in assets. The survey found that 32 percent of those companies plan to boost allocations to long-duration debt in 2011, 24 percent intend to increase other corporate bond holdings and 13 percent expect to boost their government debt allocation.

“Investors are concerned about the low level of all-in yields on Treasuries,” Nicholas Finkelman, a money manager at New York-based Ryan Labs Inc., which oversees $3.5 billion, said Oct. 5. “Pensions are moving into higher corporate bond exposure on the back of this volatility.”

--With assistance from Tom Keene and Liz McCormick in New York. Editor: Paul Cox, Dave Liedtka

To contact the reporter on this story: John Detrixhe in New York at

To contact the editor responsible for this story: Dave Liedtka at

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