Pension Woes Capture Execs' Attention

October 20, 2003 ( - Months of scare headlines about a potential pension funding crisis in the defined benefit world have gotten the unwavering attention of corporate boards in the US and Europe, a new survey found.

Boards at nearly nine out of 10 US companies now deal directly with pension plan financial performance, according to a Towers Perrin survey of chief financial officers (CFO) of Fortune 1000 companies that sponsor defined benefit pension plans. CFOs reported a heightened concern by directors and among managers – reflecting the toll that depressed stock values and declining interest rates have taken on corporate pensions. In fact, about three-quarters of the US CFOs who participated in the survey reported that their companies’ pension plans are now underfunded.

In the poll:

  • 40% say pension plan financial performance is of significant concern to their companies’ CEO
  • 26% say it is of significant concern to their board of directors
  • 24% said deferred pension costs and their potential impact on total shareholder value are a significant concern for their companies
  • 20% believe it is a significant concern to company employees
  • 18% have significant concerns about the impact of higher pension expense levels on their company’s ability to meet future earnings targets.

The executive spotlight on pension woes is not surprising considering a recent Towers Perrin analysis of pension plan financial performance for 300 Fortune 1000 companies offering pension plans, according to a Towers news release.

The analysis found a major dropoff in pension funding status with the average plummeting from 120.2% at the end of 1999 to 77.5% three years later. On average, companies had a $23.8-million pension cost on their income statement for 2002. For the 300 companies studied, the total average deferred pension cost nearly tripled from 2001 to 2002 to nearly $1.4 billion.

The European View

Meanwhile, a parallel survey of CEOs of large European companies found even higher levels of pension anxiety across the pond. For example, of the 77 European CFOs surveyed:

  • more than half (57%) said pension plan financial performance was a significant concern for their board of directors
  • more than half (53%) said that pension plan financial issues have affected their assessments of key business transactions, such as mergers and acquisitions
  • almost half (44%) said it was a significant concern for company employees.

According to the Towers survey, most US corporate leaders are resisting the urge to cut pension benefits or modify their plan’s investment strategies to improve financial results in the short term. Instead, the US CFOs surveyed are taking a long-term view of pension-plan financial issues.

When asked about the key factors their companies take into account in setting pension investment policies, 82% of the US CFO respondents said long-term investment return expectations are very important while only 4% said short-term investment return expectations are very important and 50% placed no importance on short-term expectations. Importantly, 90% of these CFOs said pension plan design is important, with 38% citing it as very important.

At the same time, the results of the Towers Perrin survey of the European CFOs suggests that the unfavorable pension plan financial performance of the past few years may accelerate the ongoing shift from defined benefit pensions to defined contribution retirement plans in many European countries. In fact, more than two-thirds (70%) of the European CFOs surveyed believe that more than half of European companies will offer only defined contribution plans within the next five years.

CFOs of companies headquartered in the UK, Germany, France, Spain, the Netherlands, Belgium and Norway participated in Towers’ European survey.

The poll is entitled The Towers Perrin 2003 CFO Survey: Pension Plan Financial Results Come Under the Corporate Microscope.