S&P: Big Improvement in 2006 DB Funding

April 26, 2007 (PLANSPONSOR.com) - Echoing other similar studies, preliminary results of new Standard & Poor's research show that U.S pension funds produced strong market returns that reduced their underfunding from $140 billion in 2005 to an estimated $36 billion last year.

An S&P news release said that its 2006 Pensions & Other Post Employment Benefits Report to be released in June is expected to show the dramatic improvement because of a boost by the second half mini-bull market of 2006. The funding ratio of the S&P 500 companies is expected to increase from the 0.90 reported in 2005 to an estimated 0.98 in 2006, the announcement said.

According to S&P’s preliminary data and estimates, S&P 500 defined benefit plans as a group showed a 97.5% funding ratio in 2006 from 90.4% in 2005, but remains well below the 128.2% level in 1999. Fully funded plans increased to 82 in 2006 from 47 in 2005.

“The improved position of pensions is the direct result of a healthier market in 2006, as market returns contributed $162 billion into the funds in addition to the $48 billion contributed by employers and $25 billion contributed by employees,” said Howard Silverblatt, Senior Index Analyst at Standard & Poor’s and author of the upcoming report, in the news release. “At this point, pensions are expected to improve in both their funding status and evaluation ratios. The analysis is based upon the expectation of slightly higher interest rates and a continued, moderate improvement in the equity markets. Based on our projections, we expect to see 2007 pensions to be fully funded on an aggregate basis by year-end.”
According to the announcement, the report also conducted an initial review of Other Post Employment Benefits (OPEB). Within the S&P 500, 307 companies had OPEB obligations, with the aggregate underfunding in 2006 of $292.2 billion – an improvement from the $320.9 billion in underfunding in 2005. Funding status improved to 24% from 2005’s 22.1%, but only represents a fraction of the pension rate of 97.5%.

Combined, pension and OPEB assets set aside for issues in the S&P 500 amounted to $1,529.8 billion in 2006 to cover $1,858.4 billion in obligations, with the resulting underfunding of $328.7 billion a significant improvement from the $461.3 billion underfunded status of 2005, S&P said.