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Pension plan contributions will surge for employers in 2012


Employers will see their required pension plan contributions surge this year, as the value of plan liabilities has soared due to falling interest rates while the value of plan assets has barely budged due to low equity market returns.

A Mercer L.L.C. analysis of pension plans sponsored by companies in the S&P 1500, released last week, found that the average plan funding level sank to 75% as of the end of last year. That's down from 81% a year ago and 84% as of the end of 2009 (see chart).

At year-end 2011, the value of plan assets inched up to $1.45 trillion from $1.37 trillion a year earlier, but plan liabilities leaped during that period to $1.93 trillion from $1.68 trillion.

In all, the aggregate funding deficit widened to $484 billion, up from $315 billion at the end of 2010.

Similar findings were reported in a Milliman Inc. analysis—also released last week—of plans offered by the 100 U.S. employers with the largest plans. That analysis found that the average plan funding level fell to 72.4% at year-end 2011, down from 84.1% at year-end 2010.

That steep drop in plans' funding levels will translate into record plan contributions. Towers Watson & Co. for example, projects that employers—excluding a few categories, such as nonprofit organizations—will have to contribute nearly $191 billion to their plans in 2012.

That's up from just more than $155 billion in 2011 and a huge increase compared with the nearly $89 billion Towers Watson estimated that employers pumped into their plans in 2010 and the more than $92 billion employers contributed in 2009.

“We are expecting some pretty significant contribution increases,” said Jonathan Barry, a partner with Mercer's retirement and risk and finance consulting group in Boston. And those hefty plan contributions are “going to be a big burden for some employers,” said Sheldon Gamzon, a partner in New York with PricewaterhouseCoopers L.L.P.

The jump in required plan contributions will lead yet more employers to freeze their pension plans, Mr. Gamzon said. That would continue a trend that began to take root about eight or nine years ago.

Last year, more than 40% of Fortune 1000 companies that sponsor defined benefit plans had frozen at least one of those plans, compared with just 7.1% that had done so as of 2004, according to a Towers Watson analysis.

Still, freezing a plan provides only limited relief to employers worried about soaring plan contributions, with employers still liable to fund benefits that have accrued prior to the freeze.

“You can turn off the faucet, but the bathtub is still full of water,” Mr. Barry said.

Potentially, relief could come from federal lawmakers, who twice in recent years temporarily eased plan funding requirements.

One change came in late 2008, when the Great Recession was gaining steam. The change involved a provision in the Pension Protection Act of 2006 that generally requires employers to put enough money in their plans each year so the plans will be fully funded after seven years. That target was phased in so plans had to fund to a 92% target in 2008, while the target was 94% in 2009, 96% in 2010 and 100% in 2011.

If the target is missed in any year, employers then were required to fund toward the 100% target. The 2008 law removed that requirement so that even if the funding target were missed for a year, the funding target for the next year would not bump up to 100%.

For example, if an employer missed the 92% funding target in 2008, its funding target for 2009 still would be 94%, not 100%.

Then in 2010, Congress provided additional relief, giving employers more time to amortize funding shortfalls for any two plan years between 2008 and 2011. But certain conditions attached to the relief sharply limited its appeal.

Experts have their doubts as to whether Congress will ease funding rules again. “Personally, I'd be surprised. Pension funding relief is not high on” lawmakers' agenda, Mr. Barry said.

“We'll have to see how this plays out,” said Mike Archer, director of intellectual capital development in Parsippany, N.J., for Towers Watson's North America retirement practice.

For now, the only sure thing that will boost plans' funding levels will be strong equity market returns and rising interest rates, Mr. Barry said.