GAO Highlights Pension-Fund Risks

From 1995 to 2002, while most of the 100 largest plans had assets that exceeded their then-current liabilities, on average 39 of these plans each year were less than 100 percent funded on a current-liability basis.

More than half of the 100 largest pension plans were not fully funded as far back as 2002, and about one-fourth were less than 90 percent funded, according to a new report from the Government Accountability Office. The GAO also found that many companies were able to skirt rules for funding pension plans during the stock market’s boom in the 1990s and its subsequent bust.

According to the report, from 1995 to 2002, while most of the 100 largest plans had assets that exceeded their then-current liabilities, on average 39 of these plans each year were less than 100 percent funded on a current-liability basis. In other words, their plans’ current liabilities exceeded plan assets reported at their actuarial value.

The GAO report did stress that “overall, reported plan funding levels were generally stable and strong over the late 1990s,” with no more than 9 of the 100 largest plans less than 90 percent funded in any year from 1996 to 2000. By 2002, however, this clearly changed.

What’s more, because of leeway in the actuarial methodology and assumptions that sponsors may use to measure plan assets and liabilities, “underfunding may actually have been more severe and widespread than reported” at the time, the agency added.

Even more alarming, the GAO report noted that each year, on average, 62.5 percent of sponsors of the 100 largest plans made no annual cash contributions to their plans. One key reason: funding rules allow a sponsor to satisfy minimum funding requirements without necessarily making a cash contribution each year, even though the plan may be underfunded, according to the report.

As a result, between 1995 and 2002 very few sponsors of the 100 largest plans were required to pay an additional funding charge, designed to reduce severe plan underfunding. Most of the affected plans were less than 80 percent funded by the time they were assessed an AFC, the report found, and those that owed the charge were likely to remain significantly underfunded and to be assessed again in the future.

Indeed, about 30 percent of the time a plan was assessed an AFC, the sponsor of that plan did not make a cash contribution in the year that the AFC was assessed.

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