US Pension Funds Still Underfunded, but Better Than Last Year

At the end of 2005, pension plans for companies in the benchmark Standard & Poor’s 500 index were 90% funded, Credit Suisse accounting analyst David Zion told Reuters.

The 2005 figure represented an improvement from the $154 billion underfunded balance S&P companies carried at the end of 2004.

“It was the third year in a row where the health of the pension plans improved,” Zion said in a research note. “Of course, if interest rates continue to go up and if the stock market keeps going up, the plans will get even healthier this year.”

Companies are still facing significant pension liabilities which could cut into shareholders’ equity under the new accounting rules, Zion told the wire service. Of the S&P 500 companies, 319 still had underfunded pension plans, 250 of those plans were less than 90% funded, and 78 companies had plans that were less than 70% funded.

Apart from the ongoing shift to defined contribution plans, the fact the S&P companies’ pension funds still suffer from underfunding amplifies the fact that many US employers still rely on defined benefit plans, where employers pay retired employees a specific amount, based on salary and years of service.

The funding status of pension plans has become increasingly controversial as companies with large liabilities have been switching to defined contribution plans (see Expense and Funding Volatility Lead Co.’s to Ax Pension Plans ), most notably Northwest (see  Northwest Pilots OK DB Plan Freeze ), Milliken & Co. (see   Textile Giant Announces Pension Plan Freeze ) and IBM (see  IBM Beefs Up 401(k), Backs Off DB – Come 2008 ).