Underfunded Pension Plans On The Rise

Compiled ByTonya Vinas The percentage of employers with fully funded pension plans declined from 84% in 1998 to 37% in 2002, according to a new Watson Wyatt study. The Washington, D.C.-based consulting firm said the decline in 2002 would have been even greater if Congress had not passed the Job Creation and Worker Assistance Act of 2002, which increased the maximum interest rate companies can use to determine the present value of benefits earned to date under the plan (the higher the interest rate, the lower the present value of future benefits). "With almost two-thirds of pension plans falling short, we expect to see many companies struggling in the midst of a very bad economy to make massive cash contributions to improve their funding levels," says Kevin Wagner, a retirement practice director for Watson Wyatt. A fully funded pension plan is one where the market value of plan assets is sufficient to cover at least 100% of benefits accrued by employees to date. The downward trend is expected to continue in 2003. The study shows that companies are making changes to their funding practices to improve their position over the long-term, including making plan contributions that exceed the minimum funding levels required by the Employee Retirement Income Security Act (ERISA). In 1992, 57% of companies were funding their plans at the ERISA minimum, compared to 30% in 2002. While the decline in fully funded plans was significant, Wagner says companies should not overreact. "The best course of action is to focus on developing appropriate funding policies that balance the capital needs of the underfunded pension plans against the overall capital needs of the organization, keeping long-term goals in mind." The 2002 Survey of Actuarial Assumptions and Funding is Watson Wyatt's 34th annual survey of pension plans in the United States covering 1,000 or more active participants.