US – Up to 65% of US pension plans may require contributions from employers in 2003 due to lower stock market values, says consultancy firm Watson Wyatt.
“The stock market’s steady decline is expected to force US companies to contribute billions of dollars into their pension plans in the next several years to address funding shortfalls and comply with federal laws that protect workers’ pensions,” the firm said in a statement.
It said that around 15% of employers made pension plan contributions in 2000. Twenty-five per cent made contributions in 2001. It estimates that around 30% of plans will need contributions this year. And if current market conditions persist, the figure could rise to 65% in 2003.
It adds that as asset values have fallen, liabilities have risen. The result is that fewer companies have sufficient funds to fully cover their pension liabilities.
“In fact, Watson Wyatt research shows that only about 40% of pension plans had assets in excess of plan liabilities as of January 1 2002, down from about 85% in 2000.” It says that only around 20% of plans will have enough funds to cover liabilities in 2003 – if current market conditions continue.
After showing declines for the year to date, stock markets have recently been on the up again. The Dow Jones industrial Average, for example, gained 5.4% in November compared to a fall for 11.7% for the year as a whole.
The company also called for a re-think on how pension liabilities are calculated.
It proposed that an employer’s current liability should be determined based on interest rates in effect at the date of the plan’s valuation rather than on the current liability based on a four-year weighted average of US treasury bonds.
“This measurement represents a much more accurate measure of the plans’ funded status at the valuation date,” says Kevin Wagner, a retirement practice director at the firm.