The 100 largest pension funds run by public U.S. companies had a record funding shortfall of $326.8 billion at the end of 2011, as sagging stock prices and low interest rates combined to lower investing returns and increase liabilities, a report released on Thursday by pension consulting firm Milliman said.
The shortfall at the 100 funds, which collectively manage about $1.2 trillion, means companies either will need to pour in billions more dollars of cash or press for further regulatory relief from Congress. The companies contributed $55.1 billion in 2011 but may need to add more than $80 billion this year, Milliman said.
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Ford Motor Co and Exxon Mobil, which run two of the largest funds, have already said they plan to add $3.8 billion and $2.9 billion respectively for 2012. And eight other companies including Boeing Co and Verizon Communications Inc, have announced planned to contribute at least $1 billion each.
"With over $15 billion already committed by just 10 companies, if the rest of the big funds just keep contributions at the same level as last year, we'll be up over $80 billion," said John Ehrhardt, a principal in Milliman's New York office.
Pension payments do not directly reduce companies' net income and can reduce taxes owed. But the cash cannot be used for other purposes like building a new factory or research and development.
Lawmakers in Washington are weighing a change to a key accounting rule that dictates how companies calculate their underfunding levels.
Contributions are generally required when underfunding dips to having just 80 percent of the money needed. The change being pushed by the U.S. Chamber of Commerce and others would make it easier to remain above the 80 percent level.
After two prior years of strong investment returns, the 100 funds gained just 5.9 percent on average in 2011, Milliman found. Stocks in the United States were flat in 2011 and other equity markets around the world suffered losses, offsetting big gains on long-term bonds.
And lower interest rates increased the value of the funds' future liabilities which are typically calculated with a discount rate linked to the yield of high-quality corporate bonds. The median discount rate dropped to 4.8 percent from 5.4 percent a year earlier.
Funds dramatically increased their investment allocation to bonds at the expense of stocks. The funds had 38 percent in stocks, 41 percent in bonds and 21 percent in alternatives like real estate and hedge funds at the end of 2011, Milliman said. That reflected a nearly 5 percentage point increase in the bond allocation and the first time bonds exceeded the amount in stocks in the history of the survey.
The shift is part of a strategy to better match funds' investments with their future obligations to retirees, said Andy Hunt, a managing director at money manager BlackRock.
The goal of so-called liability driven investing is to match the cash flow coming in from a portfolio of bonds with the retiree payouts the funds know they must make in coming decades, Hunt said.
"It's been talked about for a long time but it has been happening gradually," Hunt said.