Towers: DB Funding Picture Brightened in 2004

January 10, 2005 ( - The defined benefit funding picture at Fortune 100 companies was a bit brighter by year-end 2004 with the plans carrying an average 88% funding level, according to new Towers Perrin estimates.

A Towers Perrin news release said the latest DB funding data was up from an 84% funding level 12 months earlier with both healthier 2004 investment returns and stepped-up plan sponsor contributions listed as driving the improvement.

But there still are problems. To wers Perrin estimated said that the 81 Fortune 100 companies offering defined benefit plans had aggregate pension underfunding of $79 billion as of December 31, 2004.

Despite the funding improvements, Towers Perrin’s analysis found that deferred pension costscosts for pension benefits attributed to past service, but not yet expensed – rose in 2004. For Fortune 100 pension plan sponsors, deferred costs averaged $3.1 billion at the end of the year, Towers Perrin estimated.   For the 81 companies, this represents over a quarter of a trillion dollars ($252 billion) in deferred pension costs as of December 31, 2004.   At this level, assuming a 33% corporate tax rate, year-end deferred pension costs represent about 24% of retained earnings for the average Fortune 100 company, Towers said.

“Deferred costs of this magnitude create uncertainty about future earnings,” said Steven Kerstein, Managing Director of the retirement consulting practice in Towers Perrin’s HR Services business, in the news release.   “Absent positive capital market conditions in the years ahead, these deferred costs must eventually be recognized on companies’ books.   As a result, increasing pension costs are likely to remain a concern for years to come.”

In response to declining funded ratios caused by negative capital market trends between 2000 and 2002, most companies have sharply increased their pension plan contributions in recent years.   The average Fortune 100 company’s pension payment skyrocketed from $78 million in 1999 to an estimated $460 million in 2004.

Also, average pension contributions in recent years have significantly exceeded average service costs (the value of annual pension benefit accruals) for the companies studied.   Pension service costs for the Fortune 100 have averaged approximately $230 million annually in recent years.   Contributions in excess of annual service costs played an important role in improving pension funding levels over the last two years, according to the survey.

More information about Towers Perrin is at .