Human Capital & Careers

S&P Warns of Benefit Underfunding

Despite 16 consecutive quarters of double-digit earnings growth, corporate pension plans are only 90 percent funded; the funding level for other po...
Stephen TaubJune 7, 2006

Corporate earnings have been strong for several years, but you couldn’t tell just by looking at corporate pension plans, according Standard & Poor’s.

Traditional pension plans remain only 90.4 percent funded, S&P found, receiving minimal contributions despite 16 consecutive quarters of double-digit earnings growth. For 2005, defined-benefit plans as a group were underfunded to the tune of $140.4 billion.

Granted, this is a slight improvement from the 88.5 percent funding level of a year earlier, when pension plans were $164.3 billion underfunded. It pales, though, next to the 128.2 percent level of 1999, at the height of the bull market, when plans were $280 billion overfunded.

In fact, the number of fully funded plans fell from 55 in 2004 to 47 last year.

“At the beginning of the 2005, pensions were expected to improve in both their underfunding and evaluation ratios,” said Standard & Poor’s senior analyst Howard Silverblatt, in a statement. “This belief was based upon projected higher interest rates and a continued improvement in the equity markets. However, interest rates were little changed for 2005, and the lack of rate increase weighed heavily on lack of reduction in the discounted liability levels.”

The ratings agency also observed that the underfunding situation is even worse for other post-employment benefits (OPEB). Last year, 295 of the S&P 500 offered these benefits, but at a funding level of just 22.1 percent, with total underfunding of $320.9 billion.

For the S&P 500, $1,409.2 billion of assets was available to cover $1,870.5 billion in pension and OPEB obligations — amounting to a record shortfall of $461.4 billion.

“The light at the end of the OPEB tunnel is clearly another train, as it has now become evident that many companies plan to limit their OPEB costs and exposure by capping their annual contribution and limiting the annual increases,” added Silverblatt. “Since companies are not required to set up separate funds for OPEB, the majority of them choose not to.”

Indeed only four S&P 500 companies were overfunded for OPEB last year: Comerica, First Horizon National, PerkinElmer, and Principal Financial.

“Simply put,” said Silverblatt, “the state of OPEB is extremely poor.”