A Fifth of Companies Face Severe Pension Liability Risk

August 18, 2005 (PLANSPONSOR.com) - Only about one in five Fortune 1000 companies face relatively high financial risk from their pension liabilities, according to a new study.

A Watson Wyatt news release said that its analysis also found that collective pension liabilities are likely to only do minimal damage to the US economy.

In addition to the 20% of companies facing severe financial impacts to their core business from the pension liabilities, Watson Wyatt researchers found that half of the firms studied face little risk and 30% face moderate risk. However, even those companies in good shape from a risk perspective may still not be out of the woods if the economy sours, the study said.

The analysis also found that the companies that carry the majority of the total value of pension risk tend to be financially healthy and likely able to weather a financial crisis.   Eighty-four percent of the aggregate pension risk currently in the system belongs to companies with an investment-grade bond rating, Watson Wyatt said. The remaining 16% 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 Julia Coronado, senior research analyst at Watson Wyatt, in the news release.   “In fact, since there are relatively few companies with high pension risk, the broader risk to the US economy seems to be minimal.”

Watson Wyatt’s Pension Risk Index (PRI) quantifies the amount of risk a particular company’s pension fund imposes on its core business.   The analysis measures the potential dollar value decline in a pension plan’s funded status (reflecting both plan assets and liabilities) under a worst-case financial market scenario.   The potential drop in funding is then compared with the sponsoring company’s market value.  

More on Watson Wyatt’s Pension Risk Index is  here .