Pension Funding Levels Squeezed

April 5, 2002 ( - Slumping markets and looming liabilities combined to put the squeeze on pension plan funding levels last year, according to PLAN SPONSOR's 2002 Defined Benefit survey.

While last year’s data found 57% of plans were overfunded, the latest data show that dipping to 48%.

Despite enjoying better market returns, on average, than their larger kin, smaller plans were much more likely to coming up short on the funding side. 

More than 31% of respondents with less than $10 million in assets are only 80% to 94% funded, while, among larger plans, 75% of those with between $1 billion and $10 billion in assets are overfunded and 80% of those with more than $10 billion.

Weak equity markets explain part of the dropoff in funding, but plan sponsors also blame the historically low yields of the 30-year Treasury bond that is used in the funding calculation. The low rates of return translate to artificially high funding requirements.

Against respondents’ average long-term actuarial target return of 8.7%, returns for our plan sponsor sample are paltry, particularly when coupled with last year’s meager return of 4.1%.

However, sponsors seemed more complacent this year about manager performance, with nearly a quarter reviewing manager performance just once a year, versus 16% conducting annual reviews a year earlier. More sponsors were meeting with managers just once a year, as well-through fewer were content to hold such meetings as necessary.

Funding Gaps

In total, 50.7% of plan sponsors made contributions to their pension plans within the last year, down from 62% a year ago.  Despite the overall gap in funding – or perhaps because of it – smaller plans were more likely to have made a contribution within the last year. 

More than two-thirds (68.75%) of plans with less than $10 million in assets under management had done so, compared to:

  • 37.5% of plans with $500 million to $999 million in assets
  • 36% of plans with $1 billion to $9 billion in assets
  • 40% of plans with more than $10 billion.

Future Tense?

As for the future, no less than 62% of almost 400 fund officials responding to our survey in January told us that they planned to make contributions to their defined benefit plans within the next 12 months-the same percentage that planned to make such contributions over the course of 2001.

Among plans with less than $10 million in assets, three-quarters intend to pour in money this year, up from the 69% who planned to make funding contributions last year.

Keeping Track

The share of respondents who rely on the expertise of investment consultants dipped just slightly to roughly 78% versus 81% a year earlier – and a slim majority (59%) of sponsors require their managers to be AIMR compliant with their performance reporting.  Roughly a third of plans with less than $200 million in assets – didn’t know. 

Still, most pension funds also increasingly measure their performance against their peer universe. Some 79% measure their performance this way, up from 77% in the previous survey.

Smaller plans are less likely to do so – only 69% of plans with less than $10 million in assets engage such benchmarks versus 80% of plans with more than $10 billion in assets.

MORE on our Defined Benefit Survey 2002 .