Plans Take Healthy Turn
Rising Markets Aid Big Firms' Funds; Failure Risk Lessens
By Theo Francis
The Wall Street Journal
Tuesday, January 23, 2007
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
'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
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.
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
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
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
"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