Listen — it’s that great sucking sound.
No, it’s not the noise of jobs going south of the border. It’s the gurgling of the amount of cash previously used to fund corporate pension plans.
Indeed, fully funding a corporate pension plan seems to have rapidly become passé among corporate managers. In fact, the percentage of employers with fully funded plans plummeted from 84 percent in 1998 to 37 percent in 2002. This, according to a new Watson Wyatt study.
That massive shortfall is likely to put a fair amount of hurt on available cash at companies that have pension shortfalls. “With almost two-thirds of pension plans falling short, we expect to see many companies struggling in the midst of a very bad economy to make massive cash contributions to improve their funding levels,” said Kevin Wagner, a retirement practice director for Watson Wyatt.
A fully funded pension plan is one in which the market value of plan assets is enough to cover at least 100 percent of benefits accrued by employees up to the current date.
Things might even be worse than indicated by the survey, which looked at 419 companies reporting on 472 pension plans with 1,000 or more participants.
Last year’s funding falloff would have been even greater if Congress had not passed the Job Creation and Worker Assistance Act of 2002, according to Watson consultants. That law boosted the maximum interest rate companies can use to determine the present value of benefits earned to date under the plan (the higher the interest rate is, the lower the present value of future benefits will be).
Further, the downward trend is likely to continue through 2003. “If interest rates remain low and the overall performance of the stock market remains weak, the percentage of companies with underfunded pension plans is likely to increase even further,” Wagner said.
Many companies, however, are hearkening to the call. One key action more and more companies are taking to correct the problem; making pension contributions of more than the minimum funding levels required by the Employee Retirement Income Security Act (ERISA). Just 30 percent of companies studied were making the minimum contribution in 2002. Ten years ago, 57 percent were funding their plans at the ERISA minimum.