Investment Yields Keep Pension Funding Levels Low

By Staff Report

Feb. 19, 2009

Although higher bond yields in January helped to trim funding shortfalls in defined-benefit pension plans, most U.S. pension plans remained significantly underfunded, pension experts at two consultancies report.

The discount rates used by most U.S. corporations to estimate their defined-benefit pension plan liabilities grew last month in response to a 0.75 percent increase in long bond indexes, which were largely driven by increased Treasury bond yields, according to New York-based Mercer.

However, pension assets were still down significantly due to lower investment yields.

The Mercer report estimated that U.S. defined-benefit pension plans are about 75 percent funded, based on a funding deficit of $380 billion. It is based on an analysis of Standard & Poor’s 1,500 companies.

A separate report issued by Watson Wyatt Worldwide put the funding level at 74 percent based on a shortfall of $366 billion. The report is based on 450 of the Fortune 1,000 companies.

Pension funding levels are determined by comparing the value of plan assets with liabilities.

Alan Glickstein, a senior retirement consultant in Watson Wyatt’s Dallas office, noted that tougher funding requirements—mandated by the Pension Protection Act of 2006, which went into effect last year—may also have contributed to the ominous calculations.

“Although no recession comes at a good time, this recession couldn’t have come at a worse time for pension plan sponsors,” he said.

At year-end 2007, 46 percent of defined-benefit pension plans were funded at between 90 and 110 percent, and only 5 percent had funding levels between 50 and 70 percent, according to Watson Wyatt.

By contrast, at the end of 2008, 5 percent of plans were funded between 90 and 110 percent, and 61 percent were funded at between 50 and 70 percent.

Filed by Joanne Wojcik of Business Insurance, a sister publication of Workforce Management. To comment, e-mail

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