(Bloomberg) Corporate pension plans in the U.S. are falling behind future payouts to retirees by the most in a decade amid a slowing economy and the lowest bond yields on record.
The gap between the assets of the 100 largest company pensions and their projected liabilities widened by $108 billion in August from the previous month to a $459.8 billion deficit, actuarial and consulting firm Milliman Inc. said yesterday in a statement.
The shortfall is "like a silent heart attack," said Kenneth Hackel, president of research and consulting firm CT Capital LLC. "People aren't recognizing the symptoms until the patient falls on the ground."
Corporate pension plans are a casualty of Federal Reserve efforts to keep interest rates low to prevent the economy from slipping back into recession. As AA rated company bond yields, a benchmark in determining future liabilities, last month reached the lowest ever, obligations increased $91 billion to $1.54 trillion, Seattle-based Milliman said, without disclosing company names.
AA corporate bond yields fell to 2.81% last month from 3.9% at the end of 2009, according to Bank of America Merrill Lynch index data. That compares with the average of 5.8% in 2008.
While lower bond yields help companies borrow cash more cheaply, the "dark side" of the "low-yield environment that is projected to persist over the near term" is that companies may have to divert more money to their pension plans or make riskier investments, such as leveraged loans, real estate and private-equity, Fitch Ratings said Aug. 23 in a report.
Contributions to the 100 biggest corporate pension plans increased to $54.5 billion in 2009 from $29.5 billion the previous year and compares with an average of $38.7 billion for the prior five years, Milliman said in an April report. Companies may have to spend even more cash to fund their pensions, Hackel said.
"It's a major, major hit for companies to take," said Hackel of Alpine, New Jersey-based CT Capital. "Sponsors are going to need to step up their contributions massively."
Corporate pension plans have deteriorated since the fall of 2008 as the worst financial crisis since the Great Depression caused investments to plunge, eroding the value of pension assets. The Standard & Poor's 500 Index lost 37% that year, while U.S. corporate bonds lost 10.9%.