Upfront: Pension Plan Pain Eases

Pension plan sponsors have been breathing a little easier over the past year; strong capital market results have boosted plan funding levels after three years of dramatic declines. Towers Perrin's hypothetical benchmark pension plan notched a 20.7 percent return in 2003, its highest since 1995. Over the prior three years, it averaged an annual fall in value of 4.3 percent. The fictitious plan allocates 60 percent of its resources to equity investments and 40 percent to fixed-income assets, which approximates the asset allocations of pension plans for the 300 large companies in Towers Perrin's benchmarking database.

The investment portfolio gain was partially offset by a 0.5 percent decline in the benchmark plan's discount rate, which increased plan liabilities by 12.7 percent during the year. The net result was an increase in the plan's funded ratio from 80.1 percent at the start of 2003 to 85.2 percent at year-end.

"After the most recent year's positive results, capital market conditions put pension plan sponsors in approximately the same funded position today that they were in at the end of 1995," says Steve Kerstein, a principal and the managing director of Towers Perrin's global retirement consulting practice in Stamford, Conn. Still, "the effects of contribution holidays that companies enjoyed during the favorable years, the delaying effects of various smoothing methodologies and the lack of regulated pension funding relief mean that pension plan contribution requirements may continue to spike upwards over the next few years," he warns.