Pension Plans Take Healthy Turn
After years of steep underfunding, pension plans are now healthy, thanks to several years of double-digit investment gains and rising interest rates, separate studies from benefits consultants suggest.
The pension plans of Fortune 100 companies ended 2006 with 102.4% of the assets needed to pay pensions indefinitely, according to an estimate expected to be released today by Towers Perrin, a Stamford, Conn., benefits consultant. That is up sharply from a low point of 81.9% in 2002, though still below the 125.8% recorded at the height of the stock-market boom in 1999.
Consultants and pension experts said the change suggests fewer pension plans are at risk of failing. That bodes well for workers dependent on the plans for retirement income and for the Pension Benefit Guaranty Corp., a federally run pension insurer that pays basic benefits if the plans aren't able to.
'The Right Direction'
"There's no reason why their funding shouldn't have improved -- everything's going in the right direction," said Jack Ciesielski, a pension-accounting expert who writes the Analyst's Accounting Observer newsletter. While some companies faced serious funding shortfalls, for many employers "it was cyclical in nature," he added.
Similar findings are echoed by a separate study of pension funding based on 2005 data, released yesterday by benefits consultant Watson Wyatt Worldwide. That study found that pensions for a group of 1,000 companies were about 91% funded in 2005, up from a little more than 80% funded in 2002.
Widespread concern over underfunded pensions and corporate decisions to freeze or cut pension benefits has helped pension legislation through Congress last year. The legislation was billed as shoring up pension plans weakened by a "perfect storm" of low interest rates and poor stock-market performance early this decade. Few provisions of the new law took effect before this year, so any improvements they may bring about aren't reflected in the estimates by the benefits consultants.
Towers Perrin's study examined the 79 companies in Fortune magazine's list of the 100 largest U.S. firms that sponsored defined-benefit pension plans. Pension plans are backed by trust funds that typically pay retirees a set amount each month for life, or a one-time payout based on that stream of payments. A plan's funded status is a measure of any gap between the fund's assets and the company's obligations under the plan.
Company Contributions
Stock-market gains were the biggest factor in the plans' recovery, averaging about 12% in 2006. In addition, rising interest rates likely reduced plan liabilities by about 3%, Towers Perrin estimated. Interest rates determine how the company converts future pension payouts into a liability on its books today.
Company contributions also improved pension funding, with average contributions rising more than fivefold since 1999. But these contributions boosted plan funding by only about 1%, Towers Perrin said.
One factor unexamined in the study: How big a role pension freezes and cuts have played in improving pension funding. Freezing or cutting benefits reduces a company's pension liabilities, which means the existing assets cover more of the company's obligations.
Towers Perrin used publicly disclosed data for each company, including asset, liability and asset-allocation figures, and took into account subsequent market returns and interest-rate changes.
Improving plan fortunes could encourage some companies to stop contributing to their plans, as many did in the late 1990s; however, pension-industry officials say last year's legislation makes that less likely.
Separately, new pension-accounting rules taking effect this year mean companies must start reflecting net pension liabilities on the balance sheet, instead of recording them in a footnote as they have for years. Under Towers Perrin's projections, "on average, the Fortune 100 will be booking an asset" rather than a liability for their plans, said Bill Gulliver, Towers Perrin's chief actuary for human-resource services.
Big Exposure to Stocks
The transition from prior accounting rules to the new ones, however, mean that the Fortune 100 companies are likely to see a combined decrease in shareholders' equity of about $160 billion, improved from prior estimates of $245 billion, Towers Perrin said.
Watson Wyatt's study showed that plan funding improved by about $10 billion in aggregate between 2004 and 2005. Investment returns improved funding by about $114 billion, and company contributions added about $51 billion, offset by the growth of benefits for employees in the plans, Watson Wyatt said.
"The bottom line is, things are getting better," said Mark Warshawsky, Watson Wyatt's director of retirement research and a former Bush administration Treasury official. He said preliminary estimates for 2006 show further improvement.
Still, Watson Wyatt's analysis shows that pension assets were invested about 64% in stocks, on average -- meaning another sharp downturn could wreak havoc with pension funding once again.
Write to Theo Francis at theo.francis@wsj.com1
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