Pension Risk for Big Companies Slides in 2005

January 22, 2007 ( - The risks large companies are facing from pension liabilities are not as great a threat to their financial stability as they once were and are expected to improve even further, according to a Watson Wyatt's Pension Risk Index that tracked companies sponsoring defined benefit plans in 2005.

The consulting firm found that pension plan liabilities posed relatively high amounts of financial risk for only 9% of companies, down from 17% in 2003 – a decline of about half over three years.

The survey also found that plan sponsors experienced relatively low pension-related risk, with pension liabilities creating little risk to the core business for 60% of plan sponsors, an increase from about 56% in 2004 and 51% in 2003.

Watson Wyatt also tracked the funding levels of the large company plans, and found that between 2002 and 2005, the funding status increased from 82% to 92%.

According to a news release, pension liabilities are slated to continue to improve because of rising interest rates, strong market returns in 2006 and the use of new investment strategies and increased employer funding of pensions.

According to the study, aggregate pension liabilities are expected to decrease by 1% during 2006 – from $1.313 billion to $1.297 billion – mostly because of higher discount rates.

Watson Wyatt also predicted a 7% increase in pension plan assets for 2006 because of returns on plan assets and increased employer contributions of about $50 billion.

The index measures the potential dollar value decline in a pension plan’s funded status (reflecting both plan assets and liabilities) under an adverse financial market scenario. The potential drop in funding is then compared with the sponsoring company’s market value.

Further information on the PRI analysis and pension funding can be found here  .