Ryan: Five-Year Valuations Up Pension Contributions

January 7, 2004 (PLANSPONSOR.com) - Even though 2003 saw a nice run up in the broad based equity market, five-year moving averages used by many defined benefit for valuation could spell higher contributions for pensions this year.

Deploying a five-year moving average, many defined benefit plans will replace 2003’s 33.34% equity and 1.96% bond returns with returns registered in 1998.   While 1998 saw returns of 28% for equities and 8% for bonds, the calculations would lower the value of assets by 1% to 3% for pension plans currently while the simultaneous addition to liability growth of 1.96% means lower funding ratios by 3% to 5% versus 2002, according to data supplied by Ryan Labs.

Going forward, 2004 promises more of the same.   Next year smoothing techniques will replace the 1999 asset growth of around 13.96% from the calculation, with what most defined benefit plans cited by Ryan predict will be a return of 9%. Even if assets hit this target growth, they will reduce asset values by about 5% lowering asset/liability funding ratios accordingly.

Otherwise 2003 was a banner year for pension asset allocation.   Pension liabilities only grew by 1.96% in 2003, and the asset/liability differential of 18.08% was the highest annual value added since the 26.39% notched in 1999.

These returns further move the aggregate pension deficit higher.   Since December 1999, the asset-to-liability growth rate difference (pension deficit) is now -46.57%, while although improving, still suggests funding ratios below 70% for most pensions.