Underfunding is a constant worry as stocks dive, rates dive low

| Monday, Nov. 14, 2011

The roller-coaster stock market and rock-bottom interest rates have buffeted the funding levels of most corporate pension plans in recent months, experts say.

A typical defined-benefit pension plan of an S&P 500 company was only 70 percent funded, a five-year low, as of Oct. 1, according to an asset management analysis of 350 such plans by The Bank of New York Mellon Corp. October's rise in stock values pushed funding to 74.8 percent as of Nov. 1. That meant pension assets were worth enough to cover almost three-fourths of current and future benefits.

"There's no reason to panic," but these funding levels are worth monitoring, said Rebecca Davis, an attorney and head of the pension assistance program at the Pension Rights Center in Washington. "It's not until you get below a 60 percent (funding) level that it gets to be a real concern."

Thirty of the top 100 corporations ranked by Fortune magazine have a traditional defined-benefit plan that obligates them to pay retirees a specified pension amount, according to Towers Watson, a benefits consulting firm. Thirty percent of American workers are covered by such pension plans, government figures show.

While the number of companies with traditional pensions has declined for years, the funding status of such plans is important because retirees and many current workers will depend on them for years to come. The level of funding also can affect how much money plan members can withdraw upon retirement.

Under federal regulations, a worker in a pension plan worth enough to cover 60 to 80 percent of its benefits can take only half his retiree benefits in a lump sum and half in monthly payments. But a worker in a plan below 60 percent funded cannot take a lump sum at all.

"I'm relying on that pension, heck yeah," said Jackie Vetterly, 49, an insurance assistant for large accounts at Liberty Mutual Insurance Co. and participant in its pension plan.

"I like working, but I want to be able to retire and have some fun. And I worry that pension might not always be there," said Vetterly of Avalon.

'A very volatile ride'

Davis advises pension participants to look at the annual statements companies provide within four months after the end of the fiscal year to check on the funded status of their specific plans.

Pension assets consist of various investments whose values fluctuate with the stock market and interest rates. So when the stock market is down and interest rates are low, corporations must add cash to those pensions to make sure they can cover benefits.

"It's been a very volatile ride since the beginning of 2008," said Mary Mitchell, a retirement practice leader at Buck Consultants LLC, Downtown.

"If you go back to the 1990s when we had a nice run-up in pension assets and interest rates were higher than today, you had plans that were significantly over-funded" at more than 100 percent of the amount needed to cover current and estimated pension payments, Mitchell said. "The drop-off has been substantial."

"If the stock market comes back and interest rates rise, it'll make this pain go away," said Andrew Wozniak, director of portfolio management and investment strategy for BNY Mellon.

Federal law says companies whose defined-benefit plans are determined to be under-funded have seven years to make up a shortfall. As the status of a pension changes up or down each year, companies must add millions some years and need not add anything in other years.

At H.J. Heinz Co., the pension plan is 118 percent funded, with $496 million more than it needs to cover current and future benefits.

'There's no danger'

In years past, many Western Pennsylvania workers' and retirees' benefits were reduced after their employers went bankrupt and the pensions were assumed by the federal Pension Benefit Guaranty Corp. About 15 percent of people in PBGC-assumed plans get less than their original maximum benefit amount, which currently stands at $54,000 a year, spokesman Jeffrey Speicher said.

The PBGC paid about $520 million in benefits to 85,000 people in Pennsylvania in 2009 — the most money of any state — the agency's figures show. The latest figures show PBGC plans were 78 percent funded as of Oct. 1, 2010, "so there's no danger of us running out of money," Speicher said.

PBGC plans were running a $23 billion deficit a year ago, which is improved from a record deficit of $33.5 billion in May 2009, after the agency took over big corporate pension plans in the past decade.

US Airways pensions were turned over to the PBGC after the airline's two trips into bankruptcy in 2002 and 2004. Other local pension plans assumed by the pension insurer include LTV Steel, Anchor Glass, Wheeling-Pittsburgh Steel Corp. and the Allegheny Health, Education and Research Foundation.

Bart Metzger, 59, who lives Downtown, took over as chief human resources officer at Allegheny Health's successor, West Penn Allegheny Health System, about a year ago. The region's second-largest health system, West Penn Allegheny has about 11,500 workers and 2,567 retirees in its pension plan.

"I'm not worried about the pension heading south," said Metzger, noting that it is 85 percent funded.

'More than enough liquidity'

Companies with defined contribution plans — 401(k) plans — contribute amounts each year to their workers' retirement accounts that are often tied to employees' contributions. Many corporations have done that in recent years to avoid the funding volatility that stock market swings bring. But the participants' benefits, or account balance, can fluctuate with the markets.

"You now have the (Federal Reserve) trying to engineer economic growth by driving down interest rates. Plus, what's been going on in Europe and with market confidence has driven Treasury rates lower and stock prices lower," Wozniak said.

Because companies with under-funded plans shore up their pension assets by pumping in cash, however, workers and retirees need not be worried, experts say.

U.S. Steel Corp.'s defined-benefit pension plan was under-funded by nearly $1.98 billion at the end of 2010, a securities filing shows. That led the company to contribute $140 million to the plan over the summer, and it may contribute as much as $160 million more next year, said spokeswoman Courtney Boone, referring to the filings.

PPG Industries Inc.'s defined-benefit plan was under-funded by $825 million at year's end, a securities filing shows. So PPG contributed $114 million this year, spokesman Jeremy Neuhart said.

"There is more than enough liquidity in the plan to meet all 2011 benefit payments," Neuhart said. "We will continue to evaluate the funding status and will make contributions accordingly."

General Electric Co. expects to add about $1.4 billion in 2012 to its pension plan, which was under-funded by $2.8 billion at the end of last year, according to a securities filing. Next year will be the first time GE has had to make a cash contribution to the plan since 1987.

GE's pension liabilities will increase by about $140 million in December when it makes an extra monthly pension payment to 130,000 retirees, including about 875 in Western Pennsylvania. The company is mailing the additional pension check, something it last did four years ago, "to recognize retirees' past work," spokeswoman Sue Bishop said.

"Given how the economy affects pension plans, the company usually winds up putting in cash when it can least afford it," said Mitchell of Buck Consultants.

Jeffrey Saef, managing director of BNY Mellon Asset Management, said the companies could otherwise put the cash back into their businesses through hiring, tooling or plant expansion.

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