Funding levels for defined benefit pension plans at large U.S. companies improved at the end of 2009 largely due to the rebounding stock markets. However, lower interest rates, which increased pension liabilities, continued to keep funding levels well below those in 2007, according to an analysis by consultancy Towers Watson. Furthermore, overall pension deficits remain substantial, and companies will need to make large contributions to their plans over the next few years.
The Towers Watson analysis examined U.S. pension data for 431 Fortune 1000 companies and estimated their funded status for 2009. The results indicate that the average pension funded status has increased by eight percentage points—from 70 percent at the end of 2008 to 78 percent at the end of 2009.
The analysis also projects that while in 2009 pension plan assets increased by 14 percent to $1,104 billion, they remain well below their year-end 2007 value of $1,312 billion, when the average plan was fully funded.
“Pension sponsors received some much-needed positive news last year with temporary relief and a strong stock market rebound,” says Alan Glickstein, senior consultant at Towers Watson. “However, with lower interest rates and consequently larger liabilities preventing additional gains, companies still face significant pension deficits in 2010.”
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Companies still face significant pension deficits
in 2010.
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Legislative Relief Sought
According to the analysis, pension deficits at the companies studied are estimated to have declined from $293 billion at year-end 2008 to $225 billion at year-end 2009. But these same firms had a $74 billion surplus at year-end 2007. These companies are estimated to have contributed 30 percent more to their pension plans in 2009 than in 2008.
“The legislative funding relief granted last year helped many companies with their funding issues, and we are hopeful that more legislative relief is in store this year,” says Michael Archer, senior consultant at Towers Watson. “Without more relief or barring a significant extension of the capital market recovery, many companies will be forced to make sizable contributions into their plans using funds that might have been earmarked for critical business investments or other initiatives.”
Other findings from the analysis include:
•Only 30 percent of Fortune 1000 companies had estimated pension funding levels under 70 percent at the end of 2009, compared with 58 percent at the end of 2008.
•On an aggregate level—total assets over total projected benefit obligation—funding levels are estimated to have increased from 77 percent in 2008 to 83 percent at year-end 2009. This measure gives a greater weighting to larger plans and generally shows better results than the average unweighted measure.
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Group Letter to Congress Urges Pension Funding Relief
In January 2010, a coalition of more than 70 employer and labor organizations signed a letter to Congress urging legislation "as soon as possible to provide much needed relief" for defined benefit pension funds. "Without funding relief, many jobs will be lost and the economic recovery will be significantly slowed," the letter warned.
"Some have argued that plan sponsors can simply borrow the money to pay greatly increased pension plan contributions. However, access to credit remains limited," the letter says, warning that reduced hiring, reduced capital spending and staff reductions "will accelerate if plan sponsors are required to put much larger contributions into their pension plans." |
Stephen Miller is an online editor/manager for SHRM.
Related Articles:
Preservation of Pensions Paramount, Experts Warn, SHRM Online Benefits Discipline, January 2010
Pension Plan Freezes, SHRM Knowledge Center, January 2010
Employers Increasing Pension Contributions, Reducing Risk, SHRM Online Benefits Discipline, December 2009
Pension Tension: Seven Critical Questions Facing Plan Sponsors, SHRM Online Benefits Discipline, August 2009
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