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Pension Plan Funding Status Tumbled in 2008, Watson Wyatt Analysis Finds

Posted on: Thursday, 12 February 2009, 12:01 CST

Asset Drops Aggravated by Fourth-Quarter Plunge in Discount Rates

WASHINGTON, Feb. 12 /PRNewswire-FirstCall/ -- Pension plan funding levels at large U.S. companies reached historically low levels at the end of 2008 due to sharp declines in pension assets and discount rates, according to an analysis by Watson Wyatt, a leading global consulting firm.

"Changes in funded status are wreaking havoc with the projections companies have made," said Alan Glickstein, senior retirement consultant at Watson Wyatt. "Large and unexpected pension contributions will require companies to divert funds they had earmarked for other business activities into their pension plans precisely when they can least afford it."

The analysis looked at pension data for 450 Fortune 1000 companies and projected their pension funding status for 2008.* The results indicate that, on an aggregate level, funded status will decline an average of 32 percentage points, from 106 percent in 2007 to 74 percent in 2008. This represents a total loss of $445 billion, wiping out a 2007 surplus of $78 billion and leaving these companies with a combined $366 billion deficit on their year-end 2008 financial statements.

Pension funding levels are determined by comparing the value of plan assets to liabilities. In 2008, plan assets fell a total of 24 percent; since October this fall has been compounded further by rising liabilities.

For accounting purposes, the present value of future payouts to retirees (plan liabilities) is determined by using discount rates based on high-quality corporate bond yields. When bond rates drop, liabilities go up and pension funding levels go down. The analysis projects the significant decline in corporate bond yields over November and December 2008 increased liabilities in aggregate by $363 billion.

At the end of 2007, 46 percent of plan sponsors realized funding levels between 90 and 110 percent, and only 5 percent had levels between 50 and 70 percent. In contrast, Watson Wyatt estimates that only 5 percent of plan sponsors will have funding levels between 90 and 110 percent at the end of 2008, and that funding for 61 percent of sponsors will fall between 50 and 70 percent.

"Plan sponsors are feeling the effects of a pension funding crisis with both asset values and interest rates dropping," said Jim Shaddy, North American retirement practice leader for Watson Wyatt. "We urge Congress to respond with the appropriate temporary relief for plan sponsors."

* Editor's note: The 450 companies analyzed represent Fortune 1000 firms with December fiscal year-end dates for which complete data was available. These figures are estimates; actual year-end 2008 results will not be publicly available until spring 2009.

For more information, read the Watson Wyatt Insider article:

http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=20471

Read about employers' increased contributions: http://www.watsonwyatt.com/news/press.asp?ID=20380

About Watson Wyatt

Watson Wyatt (NYSE, Nasdaq: WW) is the trusted business partner to the world's leading organizations on people and financial issues. The firm's global services include: managing the cost and effectiveness of employee benefit programs; developing attraction, retention and reward strategies; advising pension plan sponsors and other institutions on optimal investment strategies; providing strategic and financial advice to insurance and financial services companies; and delivering related technology, outsourcing and data services. Watson Wyatt has 7,700 associates in 32 countries and is located on the Web at www.watsonwyatt.com.

SOURCE Watson Wyatt

Source: PR Newswire

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