Bad Year for Pensions: Largest Corporate Pensions Ended ’11 with $464B Deficit

Historically low interest rates and weak stock market gains led 100 of the largest U.S. corporate pension funds to a massive funded-status deficit of $464.4 billion in 2011, the largest deficit in the 11 years consulting firm Milliman Inc. has been tracking such pensions.

Companies measured in the Milliman study saw funding decline by $236.4 billion in 2011, more than doubling the $228 billion deficit already in place at the start of 2011. While investment returns produced an anemic $12.3 billion gain, pension liabilities increased by $248.7 billion.

Defined benefit plans offered by the 100 U.S. employers with the largest pension programs were on average 72.4 percent funded as of Dec. 31. That's down from 75 percent in November and a steep fall from the 84.1 percent average funding level at the end of 2010, the study said.

The loss in funded-status during 2011 resulted in a charge to corporate balance sheets at the end of the 2011 fiscal year and is expected to produce an estimated increase of $30 billion in pension expense for 2012, Milliman said.

Cumulative investment return for the 100 funds was just 3 percent in the past year, while the projected obligation in funding for those pensions climbed 22 percent.

While last year ended poorly, it started with some promise. The funded status reached 87.7 percent at the end of March, its high for the year. For the next three months, the funded status remained stable at 87.0 percent due to a lift from investment earnings, even as interest rates fell. Thereafter, the funded status rapidly deteriorated during the second half of 2011 as discount rates sank to historic lows. From July until the end of the year, the investment return was negative 0.6 percent, increasing liabilities by 20.3 percent and ending the year on a weak note.

Any hope for economic resuscitation for 2012 and beyond relies solely on the performance of assets as long as we remain in this historically low interest rate environment, wrote John Ehrhardt, principal and consulting actuary at Milliman.