Low interest rates and a U.S. stock market that is still down 2 percent for the year have taken their toll on corporate America's pension plans.
Pension liabilities grew 1 percent in the third quarter, as returns fell 2.5 percent, according to global consulting firm Milliman. The increase in the pension shortfall has been largely driven by investment losses in August and September, low discount rates used to value pension liabilities, and recent studies showing that people are expected to live longer over the next 20 years.
While the government has granted relief into 2021 for companies to improve their pension funding, corporate executives with severely underfunded pensions have some urgency to take action, or pay stiffer premiums to the federal Pension Benefit Guaranty Corporation to insure their programs.
As a result, companies with some of the larger unfunded liabilities have started to load up on riskier assets such as stocks and junk bonds to make up for lost ground in hopes they do not have to contribute more cash, pension managers and consultants say.
Private pensions added nearly $50 billion in so-called "other" assets, which pension consultants say could include hedge funds and private equity. The investment in other assets is nearly double the $26 billion invested in the second half of 2014 and far more than the $14.2 billion invested in all of 2010, according to Federal Reserve data.
Market losses and low interest rates have also slowed the $2.4 trillion sector's move into the safety of long-term bonds, Fed data showed, as many had planned to do when they reached a high funding status. Insurer American International Group Inc, for example, aims to grow its holdings of alternative investments that include hedge funds and real estimate by nearly 80 percent this year, while trimming its bond exposure, according to regulatory filings.
"Things are moving in the wrong direction," said Andrew Wozniak, head of BNY Mellon Fiduciary Solutions in New York.
"They are trying to find the right balance between contributing to improve the funding status and taking more risk within the pension plan to have a higher return to close that funding gap."
Thirty seven of the top 100 U.S. corporate pensions by assets tracked by Milliman had funding ratios below 80 percent at the end of 2014, more than double that level in 2013.
The overall funding ratio for these U.S. companies fell to 81.7 percent in September this year, down from 85.5 percent at the end of June, Milliman data showed.