Hewitt: Financial Execs Say Pension Liabilities Manageable

May 12, 2003 (PLANSPONSOR.com) - Despite deteriorating equity markets, falling interest rates, and the like eating away at pension funds, financial executives think pension liabilities are manageable.

The majority of companies (85%) surveyed said that they are either coping with the impact on cash flow of making pension contributions or do not think it is a problem. On the other side, 8% said they are considering terminating their pension plan because of pension liabilities and 4% have halted the conversion to a cash-balance plan, according to a Hewitt Associates study.

The management is being done by 58% of respondents through a consistent pension asset and liability strategy across the globe in which assets and liabilities are managed in the aggregate.   Further, most companies are sticking with the status quo, as 67% said they are not contemplating changes in their pension investment allocations despite market conditions, with 32% planning to make such alterations.

Concerning Rates

However, concern still permeates at 61% of companies that believe pension cost volatility is either a major problem or serious concern.   “One of the reasons for current concern is that contributions are driven by the 30-year Treasury rate which is no longer issued,” Hewitt’s North American Practice Leader for Retirement and Financial Management Mike Johnston said.   “As a result, the rate has become artificially low causing an excessive assessment of pension liabilities, and overstating the need for contributions.   Congressional action is required to change the rate, but once the rate is adjusted, pension liabilities should be more manageable.”

Others are looking down the regulatory line at possible revisions of FAS 87.   If changes are made, 63% of those surveyed believe that pension expense should reflect investment experience on a smoothed basis. Nearly half (49%) think that the balance sheet should reflect the funded status of pensions on a direct market value basis showing both over and underfunded positions and 37% said that the balance sheet should reflect some amoritizations and deferrals.

The survey of 174 midsize to large company CFOs and Treasurers was conducted in March 2003 to gauge the level of concern executives have about pension liability, cost volatility, and accounting, as well as pension regulatory and legislative issues.   Nearly two-thirds (65%) of the companies responding to the survey offer a defined benefit plan. Of those, 52% will need to contribute to their pension fund this year, with the majority (61%) of companies estimating the amount at between $1 million to $10 million, while 25% estimate the amount at $11 million to $75 million. Four percent of companies will need to contribute from $100 million to $200 million.