WASHINGTON, August 4, 2004 — The funding of large company pension plans improved last year, despite significant increases in pension plan liabilities, according to a recent analysis by Watson Wyatt, a leading human capital consulting firm.
In its analysis, Watson Wyatt found that the funded status of large company pension plans improved from an average of 82 percent in 2002 to 88 percent in 2003. The funded status of a pension plan is the ratio of the value of its assets to the estimated cost of its accrued pension obligations. During this period, pension plan liabilities increased by nearly $125 billion or about 11 percent, but assets increased by $172.4 billion or about 18 percent. The analysis was based on information for defined benefit pension plans at 622 of the nation’s 1,000 largest companies.
“After three years of low interest rates and weak investment performance, last year’s increase in funded status is a welcome change,” said Kevin Wagner, a consulting actuary at Watson Wyatt. “Many employers and participants should be heartened that their pension plans remain well-positioned to pay retirement benefits.”
The improvement in the funded status can be attributed to stronger investment returns and the nearly $72 billion the studied employers contributed to their pension plans in 2003.
Despite the recent passage of pension funding relief, Watson Wyatt estimates that the 622 companies studied will contribute another $40 billion to their pension plans during 2004.
“Employers have demonstrated real commitment to their pension plans, increasing plan contributions while interest rates were low and investment performance was poor,” said Wagner. “If employers had not attempted to compensate for the ‘perfect storm’ that hit their plans, the average funded status for pension plans would be about 81 percent today rather than 88 percent.”
The analysis also noted a continuation in the trend toward fewer defined benefit plans. The number of Fortune 1000 companies that reported sponsoring a defined benefit plan declined from 660 in 2000 to 622 in 2003.
“The U.S. pension plan system appears to be working the way it’s supposed to, although employers still must contend with volatility in their annual pension contributions,” said Wagner. Additionally, the future of defined benefit programs will remain uncertain until employers receive permanent funding relief and Congress resolves the legal uncertainty that surrounds cash balance plans, noted Wagner.
About Watson Wyatt Worldwide
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 capital strategies and related technology solutions. The firm is headquartered in Washington, D.C., and has 3,900 associates in 61 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading Europe-based consulting partnership, the firm operates globally as Watson Wyatt Worldwide. Watson Wyatt Worldwide has more than 6,000 associates in 88 offices in 30 countries.