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Pension funds ride out wild stock market swings

Posted On: Aug. 30, 2015 12:00 AM CST

Equity market volatility triggered by investor concerns about China's economy also raised pension funding worries last week, but today's situation is different than that of the Great Recession.

In 2008, the funded status of the nation's largest pension plans fell more than 25 percentage points to just over 79% amid a plummeting equities market, according to Milliman Inc.

By contrast and despite the market shock delivered by worries over China's weakening economy, plan funding rebounded last week as investor concerns eased.

For example, pension plans sponsored by employers in the S&P 1500 were an average of 78% funded on Aug. 24, down from 83% at the end of July, according to Mercer L.L.C. surveys. But by the close of markets Aug. 27, pension plans were an average of 82% funded.

Volatility in the equity markets also shook, at least temporarily, 401(k) investors.

“In 2008, the economy was slumping badly with the housing market collapsing” in certain parts of the country, said Alan Glickstein, a senior consultant at Towers Watson & Co. in Dallas.

Today, he said, “we are not in the middle of a crisis at least not the way as it appears to economic experts.”

“The fundamental story this time around is the economy doesn't look that bad. That is a very different story compared to 2008,” said Matt McDaniel, a Mercer partner in Philadelphia.

The 2008 slump in the equities markets led many companies to change their pension investment strategies.

Companies said “we can't let that happen again,” said Stuart Schulman, a principal and consulting actuary at Buck Consultants at Xerox in New York.

One of those changes was plan sponsors reducing the percentage of plan assets in equities, said Zorast Wadia, a Milliman principal and consulting actuary in New York. At the end of 2005, Mr. Wadia said, about 60% of assets in very large corporate pension plans were invested in equities. At year-end 2014, the percentage had dropped to 37%.

Also since 2008, employers such as General Motors Co., Kimberly-Clark Corp., Motorola Solutions Inc. and Verizon Communications Inc. have shifted tens of billions of dollars in plan liabilities to insurers by purchasing group annuities, which slashed the size of their pension plans and the effect of adverse investment results.

GM's 2012 annuity purchase reduced its liabilities for a pension plan covering salaried employees and retirees to $82.1 billion from $109 billion. And Ford Motor Co.'s program, which was completed in 2013, gave more than 90,000 U.S. salaried retirees and former employees the option to convert the monthly benefit to a cash lump-sum payment. About 35,000 participants accepted the offer, removing about $4.2 billion in Ford's pension liabilities.

Employers also have continued to freeze pension plans, ending benefit accruals by current employees and/or closing off the plans to new employees.

Federal lawmakers also have helped.

Congress passed legislation in 2012 and 2014, allowing employers to use higher interest rates to value plan liabilities, which reduced required contributions.

But even with those actions, pension plans still “have a meaningful exposure to risks” that include equity market slides, said Joe McDonald, a senior partner at Aon Hewitt in Somerset, New Jersey.