Goldman Sachs Explains Why Pension Plans Are Such A Pain For Corporations

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Photo: Flickr / Brenda Anderson

Corporate pension plans have gotten banged up in the wake of the financial crisis.  And the current unfavorable investment environment has made it difficult for the plan managers to invest for the future.”These challenges include low funded levels due primarily to low market interest rates, increasing contribution requirements and expense recognition for plan sponsors, and declining future return assumptions for plan assets,” writes Michael Moran of Goldman Sachs Asset Management.

Moran has a new report outlining the key issues facing pension funds.  And he illustrates the issues using our favourite medium: charts.

NOTE: Thanks to Goldman Sachs Asset Management for giving us permission to feature their charts.

Pension funds, which invest heavily in bonds, continue to struggle in the low interest rate environment

Pension expenses are at historically high levels as companies try to boost the funds

Goldman expects actual contributions to plans by companies to remain high

Meanwhile, pension plan managers have moved out of stocks and into bonds and alternative assets like real estate and private equity

Here's another look at what the average S&P 500 pension plan fund looks like

There are at least four ways companies can get out of their pension obligations. GM recently offered lump sums

More than 20% of the companies with pension plans had unrecognised losses larger than 10% of the company's market cap

The average expected return assumption for a US corporate pension plan asset have been shrinking due to low interest rates and a deteriorating global economic outlook

In 2002, 68% of pension funds assumed annual returns of 9% or higher. As of 2011, just 2% do

Unfortunately, the challenges are likely to persist for some time.

'Our annual review of pension data for S&P 500 companies and recent actions by plan sponsors and legislators confirm many of the challenges and changes we see impacting plan sponsors. Unfortunately many of these trends--low funded levels, high recognised pension expense, and large contribution requirements, despite the recent funding relief--will likely remain for the foreseeable future.'

Source: Michael Moran, Goldman Sachs Asset Management

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