Pension Funding Levels Squeezed

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 .