DB Funding Landscape Starts to Shine in 2006

January 23, 2007 (PLANSPONSOR.com) - In its latest exam of the defined benefit landscape, Towers Perrin has estimated the assets of defined benefit pension plans offered by Fortune 100 companies exceeded plan liabilities at year-end 2006 - the first time since 2000.

A Towers Perrin news release said defined benefit pension plans were 102.4% funded in aggregate at year-end 2006, up significantly from the 91.6% aggregate funded level a year earlier. According to the announcement, the improved funding picture reflects favorable 2006 investment returns as well as an interest rate hike and a high rate of contributions by plan sponsors.

Towers Perrin estimated the 79 Fortune 100 companies that offered DB plans held an aggregate pension funding surplus of roughly $23 billion at year-end 2006.

The analysis said the Fortune 100 companies achieved an estimated 12% return on their pension plan asset portfolios in 2006, well above the average 8.1% expected rate disclosed in their financial statements.   

The most powerful driver of the funding increase was favorable investment returns. Another factor contributing to the improved funded status was a slight rise in interest rates during 2006. The discount rate used to measure plan liabilities is expected to increase about 25 basis points, from an average rate of 5.5% at year-end 2005 to an average of 5.75% a year later. A discount rate increase of this magnitude is expected to drive down measured liability values by about 3%, Towers Perrin said.

In addition, according to the analysis, most companies sharply increased their pension plan contributions in recent years in response to the large unfunded liabilities that arose earlier in this decade.

The average Fortune 100 company’s pension contribution increased from a low of approximately $80 million in 1999 to an estimated $470 million in 2006. To a great extent, these contributions have been voluntary, above the value of ongoing benefit accruals (on average, roughly $300 million per year) and the minimum contributions required by law. According to the analysis, the overage of pension contributions above the value of annual pension accruals acted to increase the plans’ funded level by over 1% in 2006.

Towers Perrin   used information from 2005 annual reports for the 79 Fortune 100 companies sponsoring pension plans to project pension plan financial results as of year-end 2006.