Human Capital & Careers

Pension Funding Levels Improving

But lower interest rates have increased gross liabilities and offset much of the improvement.
Stephen TaubMay 5, 2004

The stock market’s strong performance in 2003 had a positive effect on pension funding levels among U.S. corporations with defined benefit pension plans. However, the extent of the improvement was modest because of the offsetting effect of higher liabilities, according to a new report from Standard & Poor’s Ratings Services.

The aggregate funding ratio of the 340 or so companies in the S&P 500 with defined benefit pension plans rose by 6 percentage points by year-end 2003, to 87 percent, from 81 percent the prior year, it noted.

However, this is still significantly below the peak of 128 percent at the end of 1999, the last very strong year for the stock market before the ’90s tech bubble burst.

“The increase in gross liabilities was due mainly to the effect of lower general interest rates, which caused companies to lower, by 54 basis points on average, the discount rates used to measure liabilities for financial reporting purposes,” said Standard & Poor’s credit analyst Scott Sprinzen.

S&P said it views this effect as less detrimental than the previous investment losses, given that interest rates will likely rise in the near term from their historically low levels.

The lack of greater improvement in the funding ratio also reflects the ongoing accrual of costs. For many companies during the 1990s, these had been amply covered by investment portfolio earnings, added the ratings service.

Sprinzen also stressed that other postretirement employee benefits (OPEBs) — principally retiree medical obligations — also represent a huge burden for many U.S. industrial companies. Although net OPEB liabilities are not highly vulnerable to the gyrations of the stock market, they have been significantly affected by soaring health care cost inflation, he added.