Pension Funding Continues to Improve, But…

December 20, 2006 ( - The funding levels of traditional pension plans at Standard & Poor's 500 companies improved for the fourth year in a row in 2006, according to a new report by Credit Suisse.

Credit Suisse estimates that the S&P 500 companies with traditional pension plans could finish the year with a “funding rate” of 95%, according to the Associated Press.   That would still leave the plans $77 billion underfunded in aggregate, but that’s better than the 90% level at the end of 2005.   Despite that improvement, analyst David Zion wrote, “We expect that more and more companies will choose to freeze their defined benefit pension plans in advance of the Pension Protection Act taking effect, to shrink required contributions to the pension plan and limit the growth in the pension obligation.”  

“Look for frozen plans to be replaced by defined contribution plans, thereby accelerating a trend and continuing a giant transfer of risk (from employer to employee) that has been taking place for a long time,” Zion continued, according to the AP report.

“In addition, if interest rates were to go up enough, it may become more attractive for companies to go a step further and look to close (terminate) their pension plans by buying an annuity contract from an insurance company,” he wrote.

The plans that were most underfunded   – relative to the company’s market capitalization – were:

  • Goodyear Tire & Rubber,
  • Ford Motor Co.,
  • Unisys Corp.,
  • Avaya Inc.,
  • CMS Energy Corp.,
  • Hercules Inc.,
  • Raytheon Co.,
  • Aon Corp.,
  • Electronic Data Systems Corp.,
  • Ball Corp.,
  • Lockheed Martin Corp.,
  • International Paper Co.,
  • New York Times Co.,
  • Sara Lee Corp.,
  • Cooper Tire & Rubber Co.,
  • Pinnacle West Capital Corp.,
  • Xerox Corp. and
  • Goodrich Corp.