"The financial position of pension plans has gradually improved over the last several years, but employer-sponsored plans made great strides in 2006," said Mark Warshawsky, director of retirement research at Watson Wyatt. "Regaining full financial health should help alleviate sponsors' concerns about pension deficits damaging their bottom line."
The findings are based on Watson Wyatt's Pension Risk Index (PRI), which since 2003 has quantified the amount of financial risk a company's pension fund poses to its core business. The analysis measures the potential dollar- value decline in a pension plan's funded status (reflecting both plan assets and liabilities) under an adverse financial market scenario. The potential drop in funding is then compared with the sponsoring company's market value.
A separate Watson Wyatt analysis found that the aggregate funding level for FORTUNE 1000 companies' pension plans increased from 82 percent to 99 percent between 2002 and 2006, jumping 8 percent in the last year alone. The improvement in 2006 was driven by positive market conditions, strong management by plan sponsors, rising interest rates and substantial contributions from employers.
Overall, lower pension risk among the FORTUNE 1000 is due to higher funding levels, more pension surpluses and improved company performance, Watson Wyatt experts say. "Many plan sponsors are now better positioned for the future, and recent movement in the discount rate is unlikely to change that," said Carl Hess, director of Watson Wyatt's investment consulting in North America. "However, such volatility underscores the need to effectively manage risk.
"Plan sponsors that adopt more sophisticated investment strategies, such as liability-driven strategies, may find that these approaches can help lock in current funding levels while achieving more predictable returns over the long term."
