Human Capital & Careers

Pension Plans: Only the Strong Survive

The number of active defined-benefit plans may continue to shrink, but the ones that remain are in more robust financial shape.
Stephen TaubApril 12, 2007

The funded status of the 100 largest defined-benefit pension plans has improved to nearly 100 percent, thanks in large part to strong investment returns in 2006, according to a new study from actuarial consultancy Milliman. In addition, rising interest rates moderated pension obligations slightly, the study also found.

Since the end of 1999, the plans averaged only a 5.7 percent annual rate of return, compared with an expected return of 8.9 percent, according to the study. But over the past four years, the plans averaged 13.9 percent; last year’s average, 12.8 percent, exceeded expected returns by almost 450 basis points, according to Milliman.

“This is very good news,” said John Ehrhardt, an author of the study, in a press release. “The losses we saw in 2001 and 2002 have been almost completely reversed, and the health of American defined benefit pension plans significantly improved last year.”

The consultancy also pointed out that under new accounting rules, companies are required to post the funded status of their pension plans and other post-retirement benefits on their balance sheets.

The 100 companies examined by Milliman have nearly $1.3 trillion in assets and an annual pension cost of $26.4 billion. For 2006, their after-tax charge to shareholder equity totaled $133 billion; their total pension expenses increased by $1.5 billion.

The consultancy also asserted, however, that after a steady climb over the past five years, pension expenses are expected to decline during 2007. Even so, due to the volatility of pension expenses, plan sponsors continue to be concerned about contribution and balance-sheet requirements.

Milliman also asserted that this year, fewer companies may freeze defined-benefit plans, in recognition of their value in hiring and retaining key employees in a shrinking employment market.