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Pension underfunding grows despite U.S. market rally: study

By David Randall

NEW YORK (Reuters) - The gap between what major corporations will owe retired workers and how much they have put aside grew last year despite a strong stock market rally, according to a study set to be released on Monday by Wilshire Associates.

The cumulative liability among defined benefit pension plans sponsored by companies in the benchmark Standard and Poor's 500 index increased to $1.56 trillion in 2012 from $1.38 trillion the year before, outpacing the growth in assets.

As a result, the overall funding ratio - a measure of a plan's assets divided by its commitments - for all plans fell from 79.7 percent to 78.1 percent, the study found.

Low interest rates - which are used to calculate future benefits - were a significant factor behind the increase in pension liabilities, said Russell Walker, a vice president at Wilshire and one of the authors of the report. Mergers and acquisitions also increased pension funding liabilities.

United Technologies Corp saw its liability increase by $5.2 billion after its acquisition of Goodrich Corp, for instance, while the pension obligation at Kraft Foods Group Inc increased $7.2 billion as a result of its spinoff of Mondelez International Inc .

Walker said plans will either have to invest in riskier, long-duration credit, hope that interest rates rise and/or increase their contributions.

The issue of pension funding will grow in importance to both corporations and investors alike as the oldest members of the baby boom generation retire and draw down assets.

"The huge cohort of upcoming plan beneficiaries are going to put a strain on defined benefit plans," Walker said. "There's no question that we are going to see a need to stabilize funding sooner rather than later."

Approximately 10,000 baby boomers will turn 65 each day until 2029, according to estimates from the Pew Research Center. The generation is the last to be widely covered by defined benefit pension plans that guarantee workers a set monthly benefit regardless of market conditions. Most of these plans are closed to new employees, who instead save for retirement in so-called defined contribution plans such as 401(k)s.

The pending deficits of some companies amount to billions of dollars. At $19.7 billion, Boeing Co. had the largest shortfall among the 308 companies studied. General Electric , Lockheed Martin Corp , and AT&T also had shortfalls of more than $10 billion in fiscal 2012. Pension funding could be a risk that affects the future net earnings of these and other companies, Walker said.

Overall, the plans included in the study had a median rate of return of 11.8 percent in 2012, the fourth consecutive year of gains. Plans invested a median of 49.6 percent of assets in equities, 36.4 percent of assets in fixed income, and the rest in a mix of cash, real estate, and private equity or hedge funds.

Benefit payments rose to $76.5 billion from $72.5 billion the year before.

(Reporting by David Randall; Editing by Leslie Gevirtz)

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