Thread: Pensions Make the Most of Stocks' Surge

Pensions Make the Most of Stocks' Surge

One Estimate Has Company Funds Covering 96% of Retirement Obligations, Up From 77% Last Year

By GREGORY ZUCKERMAN And
MICHAEL CORKERY

Dec. 11, 2013 6:10 p.m. ET

A roaring stock market and rising interest rates are fueling the strongest recovery in the $2.4 trillion U.S. corporate-pension sector in more than a quarter-century, giving companies new flexibility in dealing with some employee-benefit costs.

Investments in the average company's pension plan are expected to be at levels that cover 96% of future obligations at the end of the year, according to a new estimate byJ.P. Morgan Chase JPM -1.11% & Co. A separate analysis by Milliman, which provides actuarial products and services, puts the figure above 94%, while pension-specialist Mercer put the figure at 91% at the end of October. Funding levels are up from 77% at the end of last year, according to J.P. Morgan—a figure that was essentially unchanged since the financial crisis of 2008.

The news for pension plans could get better in 2014. If yields on corporate bonds and Treasurys continue to rise, as many expect when the Federal Reserve eventually reduces its bond buying, the health of corporate pensions could be further bolstered. Funding levels are partly determined by interest rates, which are used to value future retirement obligations.

Of course, if stocks slip from their current record levels, the recent gains for pensions could reverse. Such volatility in returns and funding levels is a big reason companies are looking for an opportunity to freeze pension plans and move the risk off their books. Until 2008, corporate funds were generally funded at more than 90% of their obligations, and they reached as high as 130% of obligations in 1999. But recent low interest rates and stock-market troubles have been a challenge.

The improvement in funding comes as fewer companies offer traditional pensions in favor of 401(k) programs. There were 1,442 defined-benefit plans offered in 2011, the latest year data are available from the U.S. Department of Labor, down from 1700 a decade earlier.

The return to health is giving companies new options. Some are gaining financial flexibility, because they now don't have to spend extra cash on pension contributions. Others may consider moving their plans off their books by shifting their obligations to insurance companies. These deals, which generally take place when a company's plan is close to fully funded, provide employees with the same retirement benefits but shift future liabilities to the insurers, which in turn would provide employees with annuities.

Late last year, Verizon Communications Inc. purchased an annuity from Prudential Financial Inc. covering $7.5 billion of pension liabilities owed to 41,000 retirees.

The move has worried some retirees, because their retirement benefits no longer carry a backstop from the Pension Benefit Guaranty Corp., a federal agency.

"We've lost federal protections and guarantees,'' said Bill Jones, a retired worker at New York Telephone Company, which later became part of Verizon, whose pension benefits now are provided by Prudential.

A Verizon spokesman said Prudential is a "highly rated and strong company that is well funded to meet these obligations," adding that there are state guarantee associations in place to back up the workers' annuities.

Other companies may elect to hand employees lump-sum payments, moves that are subject to worker approval.
Pension decisions such as these are "on the radar screen of every person working on pension funds," says Karin Franceries, head of U.S. strategy at J.P. Morgan Asset Management, who works with corporate plans.

Healthier pension funds may not have an immediate impact on employees but should give current and future beneficiaries greater certainty about pension payments to come.

If more companies, however, consider offering employees lump-sum payments in lieu of future pension payments, future investment decisions related to employees' retirement cash would be on their shoulders.

The narrowing of the corporate retirement-funding gap over the past year is the most dramatic since 1986. The $2.9 trillion public-pension sector also is recovering, though analysts say those plans aren't as healthy as corporate plans.

Stock-market gains account for about 60% of the improvement in pension-funding status, according to an analysis by J.P. Morgan of a range of companies. The rest has come from rising interest rates, which effectively reduce the value of future benefit payments to retirees.

"The wind is at everybody's back," says Jack Ciesielski of the Analyst's Accounting Observer, referring to strong stock prices and higher bond yields. "It's the best of all worlds."

Pension-funding details are disclosed at the end of each fiscal year, so most companies will share data in February, when many annual report are released. But analysts says both large and small companies likely will be helped this year. The pension plan of energy company Entergy Corp. ETR -0.73% was just 63% funded at the end of last year, for example.

The company had about 64% of its plans in stock investments this year.

As a result of the rise is stocks, Entergy's plan now is more than 70% funded, according to estimates from specialists.
The fund that may have been helped more than any other this year: the plan operated by Johnson & Johnson, JNJ -1.09% which was just 80% funded at the beginning of the year. The pharmaceutical giant had 75% of its plan in stocks at that time, however—the largest stock allocation in Milliman's study of 100 large companies. A Johnson & Johnson spokesman wouldn't comment.

The plan run by Berkshire Hathaway Inc., led by Warren Buffett, also is likely a big beneficiary of this year's market moves. The Omaha, Neb., company had assets covering just 74% of the pension's obligations at the end of 2012, according to figures compiled by Milliman.

But the plan had a 72% allocation to stocks—the second-largest in the universe of companies tracked by Milliman, meaning it is likely returning to better health. A Berkshire representative didn't respond to requests for comment.

Corporate plans would have done even better if they had more money in stocks. The average allocation to stocks is just 52%, down from 60% in 2007, before the financial crisis, according to the most recent estimates from J.P. Morgan. About 25% of corporate pensions now are overfunded, or have more investments than future obligations, J.P. Morgan estimates.

Public pension plans also are seeing a recovery, though not at the same rate as corporate pension plans, and many remained troubled. Illinois is trying to repair its broken state public-employee retirement system. Detroit has been given the green light by a bankruptcy judge to reduce its own pension benefits.

Other plans are holding up better, however. Public plans are currently 76% funded, up from 66% at the end of last year, J.P. Morgan estimates. Public pension funds tend to smooth their returns over a period of five years, which means that, for accounting and reporting purposes, the gains will be phased in over time.

Pension specialist Mercer recently held a webcast to help corporate clients decide on strategies to take advantage of funds that have become more flush.

"With significant improvement in funded status over the past year for most U.S. pension plans, many plan sponsors are now in a position to execute on risk transfer strategies that may not have been previously feasible," Mercer told its clients.

http://online.wsj.com/news/articles/...52261223795506

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