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Pension Plan Funding Topped 100% in 2007 but Was Short of 1990s Levels

April 18, 2008
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Related Topics: Retirement/Pensions, Workforce Planning, Latest News
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Aided by solid investment results and rising interest rates, large U.S. employers’ pension plans in 2007 were, on average, overfunded for the first time since 2001.

Investment losses and declining interest rates during the first quarter of 2008, though, have wiped out last year’s gains, according to a survey.

On average, defined-benefit plans offered by 100 large U.S. public companies were 105.6 percent funded in 2007, up from 98.8 percent in 2006, according to a survey released Wednesday by Milliman Inc.

The Seattle-based consulting and actuarial firm analyzed financial reports of publicly held companies sponsoring the 100 largest corporate pension programs for which full-year data was available. The first quarter 2008 funding levels are projections based on 2007 asset allocations and other factors, including changes in interest rates.

Of the 100 surveyed employers, 58 had overfunded plans last year, up from 41 in 2006.

The improvement was the result of both investment gains and rising interest rates. Higher interest rates have the effect of lowering liabilities.

Last year, surveyed employers earned an average 9.9 percent return on plan assets, higher than the 8.3 percent average return they expected.

At the same, the liabilities of pension plans fell because of the increase in interest rates. This is the first time that has happened in the eight-year history of the Milliman survey.

While plan funding is improving, it remains far below the levels of the late 1990s, when the bull equities market led to big investment gains. For example, in 1999 the average funding level of surveyed employers’ pension programs, which include both qualified and nonqualified U.S. plans and foreign plans, was 130 percent. It then fell sharply for several years, before reaching its nadir of 82.3 percent in 2002.

The survey illustrates how quickly pension plan funding surpluses can be wiped out when interest rates decline and the equities market slumps. Both falling interest rates and lackluster investment performance during the first quarter of 2008 wiped out 2007 gains. Milliman estimates that at the end of the first quarter, plans on average were just under 100 percent funded.

Copies of the Milliman 2008 Pension Study are available at www.milliman.com.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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