Financial health of pension plans improving, Watson Wyatt analysis finds

The number of large employers facing relatively high degrees of financial risk due to pension liabilities has declined sharply, according to a Watson Wyatt analysis of FORTUNE 1000 companies that sponsored defined benefit pension plans in 2005. Pension health will likely continue to improve due to the rise in interest rates and strong stock market returns in 2006, coupled with new investment strategies and increased employer funding.

Watson Wyattís analysis found that pension plan liabilities posed relatively high amounts of financial risk for only 9 percent of companies, down from 17 percent in 2003 ñ a decline of about half over three years. Meanwhile, more pension sponsors experienced relatively low pension-related risk. Pension liabilities posed scant risk to the core business for 60 percent of plan sponsors, an increase from about 56 percent in 2004 and 51 percent in 2003.

Watson Wyattís Pension Risk Index, on which the findings are based, quantifies the amount of financial risk a particular companyís pension fund imposes on its core business. The analysis measures the potential dollar value decline in a pension planís 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 companyís market value.

ìThanks to a sound economy and considerable corporate contributions, Americaís pension plans are generally on firmer financial footing than they were two years ago,î said Mark Warshawsky, director of retirement research at Watson Wyatt. ìWith anticipated improvements in pension plan funding due in part to new rules and reductions in pension risk, concerns about the strength of our pension system should be greatly alleviated.î

A separate Watson Wyatt analysis of pension funding found that the aggregate funding level for FORTUNE 1000 companiesí pension plans increased from 82 percent to 92 percent between 2002 and 2005.