According to Watson Wyatt, about 30% of US pension plans may require contributions this year – a number the consulting company said could skyrocket to 65% in 2003. That compares to the about 15% of employers who had to do a pension cash infusion in 2000.
In fact, Watson Wyatt research shows that only about 40% of pension plans had assets in excess of plan liabilities as of January 1, 2002, down from about 85% in 2000. Assuming the same market conditions, Watson Wyatt said only a fifth of all pension plans will be properly funded by 2003.
Current law requires an annual comparison of a plan’s current liability with its valuation assets. Simply stated, if the ratio falls below 0.9 the plan may be subject to additional minimum funding requirements above and beyond normal funding requirements, but if the ratio exceeds 1.0, plan contributions may not be deductible, Watson Wyatt said.
Because of this relatively narrow range, contributions can be very volatile from year to year. With the recent market declines, many plans went from a situation where contributions were not deductible to a situation where significant contributions had to be made, Watson Wyatt said.
Watson Wyatt said the volatility associated with pension funding encourages plan sponsors to invest more heavily in fixed-income securities than they otherwise might.