Good News for US Employer Pension Funds

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New research shows that pension plans in the United States (US) are four times more likely to be fully funded than occupational in the United Kingdom (UK). In a company press release, Aon Consulting reports that only 5 percent of UK pension plans are fully funded compared to 20 percent of US pension plans for year-end 2004 based on company annual reports. Aon Consulting is a global risk management and human capital consulting firm headquartered in Chicago, Illinois.

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Total US pension assets amount to $800 billion and £350 billion Sterling in the UK. The pension plan deficit of the average US company represents about two months worth of pre-tax profits compared to seven months for the average UK company. An alarming trend is that 25 percent of companies in the UK have pension plan deficits greater than two years' worth of profits. Less than 5 percent of US companies are in this financial situation.

Research found that US pension plans were 91 percent funded on FAS87 assumptions at year-end 2004. In comparison, 85 percent of UK pension plans based on FRS17 assumptions. FAS87 and FRS17 are rules governing accounting for pension scheme liabilities. US companies have put in cash contributions of over 10 percent of plan assets over the last two years compared with only 7 percent for UK companies. These amounts are $90 billion for US companies versus £25 billion Sterling in the UK.

“Contributions to UK pension plans have doubled over recent years. However, this increase in contributions has been insignificant to compensat for the combination of falling bond yields, increasing life expectancy, and poor equity performance,” said Andrew Claringbold of Aon Consulting (UK) said in the company's press release. Claringbold went on to say, “the fall in bond yields has had more impact in the UK than in the US. This is because benefits for most leavers and retirees in the UK have to be increased each year in line with the retail price index. Therefore, the amount of money required in the pension plan to meet these benefits is most susceptible to longer-term interest rates. This is not a standard pension requirement in the US.”

“More generally, UK companies have not increased their level of cash contributions to the same extent as their counterparts in the US. Therefore, there continues to be a great deal of pressure for pension plan cash contributions levels to remain at least as high as they currently are in the UK," Claringhold added. "This will be encouraged by the Pensions Act 2004, which will give Trustees of many pension plans more power in setting contributions and the Pension Protection Fund (PPF) levy, which is proposed to give incentivews for companies to have better funded plans.”

Brad Klinck of Aon Consulting (US) said in the company's press release, “Although US plans are, on the whole, well-funded, some plans have experienced real problems, including significant underfunding upon termination, that have affected the deficit at the Pension Benefit Guaranty Corporation (PBGC). Even though most large US plans are well funded, a significant number have recently looked to address funding concerns by making contributions well in excess of their minimum required contribution levels, increasing the funded status both of those specific plans, and of the group as a whole. It should be further noted that discussions surrounding changes to both US funding and accounting rules (FAS87) are currently taking place, with concerns regarding the PBGC's funding status and convergence with global accounting standards accounting for much of the analysis on the funding and FAS sides respectively.”

Currently being reviewed in the US House of Representatives, the provisions of the Pension Protection Act are aimed at saving private pension funds in the US. With a requirement that pension plans be fully funded with five years, employers must plan ahead and make sufficient contributions to their plans. Also if a plan is less than 80 percent funded, employers cannot pay lump sum distributions or raise benefits. Employer premiums paid to PBGC cannot be raised either.

This bill builds on the Pension Funding Equity Act of 2003 which expires at year-end 2005. The Pension Funding Equity Act required a blend of corporate bond rates to be used to calculate plan obligations instead of using 30-year Treasury bill rates as was the previous practice. The Pension Protection Act provides for a permanent interest rate. Rep. John Boehner (R-Ohio) said that this legislation will not reduce current pension payouts. Boehner is the chairman of the House Education and the Workforce Committee.

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