Nearly Two-Thirds of Corporate Pension Plans Underfunded, Watson Wyatt Research Finds

Percentage of fully funded plans declined by more than half since 1998

WASHINGTON, DC, March 26, 2003 – The percentage of employers with fully funded pension plans declined from 84 percent in 1998 to 37 percent in 2002, according to a new Watson Wyatt study. 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 percent of benefits accrued by employees to date.

The downward trend is expected to continue in 2003. “If interest rates remain low and the overall performance of the stock market remains weak, the percentage of companies with underfunded pension plans is likely to increase even further,” Wagner says.

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 percent of companies were funding their plans at the ERISA minimum, compared to 30 percent in 2002.

While the decline in fully funded plans was significant, Wagner says companies should not overreact. “Companies need to avoid knee-jerk responses to this drop. Despite a couple of bad years, pension plans have been financially efficient over the past decade and they are critical components of companies’ HR programs,” he says. “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.”

Wagner also believes the Treasury Department needs to act quickly to replace the 30-year Treasury bond rate with a composite high-quality long-term corporate bond rate that can be used to determine funding requirements. “Waiting until late this year to find a permanent replacement rate could have a dramatic and damaging impact on pension plans and plan participants,” said Wagner.

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. Four hundred nineteen companies participated in the 2002 survey, reporting on 472 pension plans. The survey provides information on the funded status of pension plans, the actuarial assumptions used to determine their funded status and the actuarial bases used to determine cash funding amounts. The survey also presents data to illustrate trends in the choice of actuarial assumptions and methods and the changes in funded status.

About Watson Wyatt & Company

Watson Wyatt & Company, the primary subsidiary of Watson Wyatt & Company Holdings (NYSE: WW), is an international human capital consulting firm that provides services in the areas of employee benefits, human resources technologies and human capital strategies. The firm is headquartered in Washington, D.C., and has more than 4,200 associates in 62 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading European-based consulting partnership, the firm operates globally as Watson Wyatt Worldwide. Watson Wyatt Worldwide has more than 6,300 associates in 89 offices in 30 countries.

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