Human Capital & Careers

Pension Risk Overstated, Says a Study

According to a new report, the companies that carry the majority of the total value of pension risk tend to be financially healthy and thus likely ...
Stephen TaubAugust 18, 2005

The pension crisis is not as dire as many observers fear, a new analysis by Watson Wyatt has found.

The consultancy found that pension plan liabilities at about half of the Fortune 1000 companies with defined benefit plans pose little risk to the financial stability of the company’s core business; about 30 percent face a moderate amount of risk. Only the remaining 20 percent or so face what Watson Wyatt deems to be relatively high risk levels.

Watson Wyatt also asserted, however, that the companies that carry the majority of the total value of pension risk tend to be financially healthy and thus likely able to weather a financial crisis. The consultancy noted that 84 percent of the aggregate pension risk currently in the system belongs to investment-grade companies, while just 16 percent belongs to companies with a junk-bond rating.

“Despite pockets of trouble in the pension system, employers for the most part face only a small or moderate amount of risk,” said senior research analyst Julia Coronado in a Watson Wyatt press release. Coronado added that since relatively few companies have high pension risk, the broader risk to the U.S. economy seems to be minimal.

Testifying earlier this summer about those troublesome pockets, Pension Benefit Guaranty Corp. executive director Bradley Belt told the Senate Finance Committee that companies with underfunded pension plans reported a record shortfall of $353.7 billion in their latest filings — considerably more than the $279 billion reported a year earlier.

In aggregate, though, according to the Watson Wyatt report, defined-benefit pension plans dropped from a nearly $300 billion surplus in 2000 to a more than $200 billion deficit by year-end 2003, then regained some lost ground. Today they are still collectively underfunded by $137 billion.

“Through the last six years, pension obligations for active plans have continued to rise, while plan assets have fluctuated drastically due to poor market returns combined with a high degree of equity exposure,” according to the report. Specifically, Watson Wyatt blamed funding shortfalls on the traditional allocation of 65 percent equities, 35 percent fixed-income securities. The 65/35 allocation served many plan sponsors well during the 1980s and 1990s, noted the consultancy, but punished them after the stock market’s collapse in 2002.