Fidelity cuts pension forecast
Expects just 7% return, yet future liability up 36%
By Beth Healy, Globe Staff, 3/6/2003
idelity Investments has lowered to 7 percent its expectation for annual returns on its employee pension plan, revealing a deeply conservative outlook by the nation's largest retirement-fund manager.
Boston-based Fidelity offers its workers a traditional pension, funded by the company, as well as a 401(k) plan, to which employees contribute.
The firm has long maintained conservative estimates for the pension plan's returns, keeping its benchmark at 7.75 percent even at the market's peak in 1999, while other big companies went to 10 percent or higher. But after stocks were trounced for a third straight year in 2002, and bond yields slumped to historic lows, Fidelity set its sights lower still, to 7 percent going forward, according to the company's annual report.
The rate is one of the lowest to be found at any major corporation, as employers grapple with how to make good on their pension promises in an era of market losses that are expected to give way to modest gains, at best.
Citigroup Inc. recently lowered its pension target to 8 percent from 9.5 percent. IBM Corp. has lowered its return goal to 9.5 percent from 10 percent. The pension fund for Massachusetts state workers has a benchmark set by the Legislature at 8.25 percent. But legendary investor Warren Buffett has suggested that 6.5 percent, on average, is more realistic for the foreseeable future.
''We always make the most conservative of assumptions on our pension plan,'' Fidelity spokeswoman Anne Crowley said.
Fidelity saw its future pension liability soar 36 percent last year, to $790.1 million, while the plan shed 2 percent of its assets, because of the market's slide. The annual report provides no details as to the investment mix of the plan. But the firm is now staring at a $415.5 million gap between cash on hand and the money it will have to pay retirees down the road. That's up 65 percent from the end of 2001 - and the figure is now roughly half of 2002 Fidelity's net income.
Crowley points out Fidelity's liability is a long way off. The firm is young, with an average age of 36. It paid out a meager $1.9 million in pension benefits last year. ''If our entire liability came due today, that's what it would look like,'' Crowley said. ''But it doesn't come due for many years.''
To be sure, the pressure is worst at industrial companies with older populations, such as General Motors, where large chunks of earnings must feed the ever-growing retirement pool. In the 1990s, when the markets were rising, companies benefited from oversize gains in their pension funds. But the reversal of fortune has been painful, forcing many companies to write big checks to their pension portfolios.
''You've had this double whammy hit defined-benefit plans,'' observed Raj Sharma, a senior vice president at Merrill Lynch & Co. in Boston. ''Companies have to take money out of their corporate cash and basically plow it into the pension plan, so the company ends up, in a strange way, working for their retirees instead of for their shareholders.''
During the boom, from 1996 to 1999, the average pension fund soared from being 85 percent funded to being overfunded, at 131 percent, according to Towers Perrin, a benefits consultancy. But by the end of last year, funding levels had slumped to 80 percent, the lowest since 1993. Fidelity is 47 percent funded; a year ago, it had 57 percent of the money on hand to meet its future obligations.
A plan that invests 40 percent in bonds and 60 percent in equities, Towers Perrin said, has seen its funding level drop 20 percent in the past year and a total of 39 percent through the three-year bear market. That's the worst decline since the 1972-1974 period, when funding levels fell by 14 percent, Towers Perrin said.
The dramatic drop in the markets has many companies mulling whether to cut pension benefits, curb them for new hires, or find other schemes to lower their retirement liability.
Fidelity ended 2002 with $374.6 million in its pension coffers, including its annual cash contribution of $53.2 million. That's about the same amount Fidelity contributed to the plan last year - the most permitted under federal tax law, Fidelity said. The firm's pension plan covers workers who stay at least five years.
''We expect to continue to fund it at the maximum level,'' Crowley said.
Beth Healy can be reached at bhealy@globe.com.
This story ran on page E1 of the Boston Globe on 3/6/2003.
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