More Companies Freeze Pension Plans

June 29, 2005
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WASHINGTON, D.C. — The rate at which large companies froze or terminated their defined benefit pension plans accelerated sharply last year even as the average funding level for plans continued to increase, according to an analysis by human capital consulting firm Watson Wyatt Worldwide.

In its analysis, Watson Wyatt found that 11 percent of companies in the Fortune 1000 that sponsor defined benefit plans had a frozen or terminated plan in 2004. The 11 percent represents 71 companies and is an increase from 7 percent (45 companies) in 2003 and 6 percent (39 companies) in 2002.

Additionally, 4 percent of employers (25 companies) had pension plans that were closed to new hires in 2004. Nearly two-thirds of the Fortune 1000 companies (63 percent) currently sponsor a defined benefit plan.

"Ongoing legal uncertainties about the status of cash balance plans and proposals to impose stricter funding requirements are driving up the number of plan closures and freezes," said Sylvester Schieber, director of U.S. benefits consulting at Watson Wyatt. "The reduction in the number of active pension plan sponsors points out the urgent need for more employer options, such as hybrid pension plans that combine defined contribution and defined benefit features.

"Unless legislative action clarifies the defined benefit system soon, the current trend of freezing and terminating plans will likely continue to accelerate."

The analysis also found that about half of the companies that terminate their plans drop off the Fortune 1000 list the following year, indicating that the decision may often be driven by weak financial performance.

About one-half of the companies that froze or terminated their plans in 2004 had credit ratings below investment grade, compared with 25 percent of firms with active pension plans.

Funding levels of plans did show modest improvement.

Improved returns in equity markets and sizable cash contributions by employers helped boost the average pension plan funding ratio to 83 percent in 2004. The average funding ratio was 81 percent in 2003 and 76 percent in 2002, the analysis found.

"After years of being fully funded or over-funded in the late 1990s, average funding levels reached a low in 2002 due to several years of poor investment results and declining interest rates that increased the present value of future liabilities," said Julia Coronado, senior research analyst at Watson Wyatt. "If the economy and stock market continue to improve, we expect overall funding levels will further strengthen over the next few years."

The transportation industry sector, which includes airlines, experienced the lowest funding status, with an average funding ratio slightly under 70 percent. In part, this reflects the financial stress and, in some cases, bankruptcy of airline companies over the past couple of years.

The banking, securities and commodity brokerage industry had the highest funding status, with an average funding ratio of 99 percent. The communication, electric, gas and sanitary services industries were also quite well funded at 87 percent.

The analysis also noted that companies that froze or terminated their plans had an average funding ratio of 75 percent, compared with 83 percent for companies with active plans. In contrast to freezing or termination, closing to new participants does not appear to be a decision made by troubled companies. The funding ratios and credit ratings of these companies were comparable to fully active plans.    

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