Defined benefit sponsors have entered their most financially confounding territory since the passage of ERISA in 1974.
The capital markets have produced the biggest and longest-running investment gains for their pension assets, while interest rates have fallen to their lowest levels ever in the post-ERISA era, potentially increasing pension liabilities significantly.
Taking these diverging trends together, has the funded status of pension plans improved?
"It hasn't necessarily," said William B. Gulliver, principal and actuary and head of the asset consulting practice, Towers Perrin, New York.
"I'm not sure funding status has improved," added Nick Gruschow, consulting actuary, Watson Wyatt Worldwide, Wellesley Hills, Mass.
And despite the market rise, both consultants believe pension sponsors will tend to lower investment return assumptions for their pension assets.
A Watson Wyatt survey of actuarial assumptions and funding of corporate plans with more than 1,000 participants, released this month, showed funded ratios -- the amount of pension assets to liabilities -- has changed little.
In 1998, 16% of plans were less than 100% funded, down from 30% in 1996, but still more than 15% in 1993. For overfunded plans, 24% had funded ratios exceeding 150% in 1998, up from 16% in 1996 but down significantly from 32% in 1993.
A model corporate pension plan Towers Perrin has been tracking since 1989 shows stock market gains offset the impact of falling interest rates for well-funded plans. According to Richard Q. Wendt, principal and director-asset and liability forecasting, in Towers Perrin's Philadelphia office, that model portfolio reached a 150.4% funded ratio at the end of December, up some 11 percentage points from the previous year. The model began in 1989 with a 127% funded ratio.
"It was a very good year when you look at asset/liability performance," Mr. Wendt said.
In a survey of 20 of its major corporate clients that had pension assets ranging from $5 billion to $20 billion and Sept. 30 FAS actuarial measurement dates, Towers Perrin found the average return on assets assumption remained at 9.28%, the same as the previous year. Their average discount rate for liabilities fell to 6.77% from 7.37%.
At Central & South West Corp., Dallas, J. Steven Kiser, director-trusts and investments, said, "The decline in interest rates has hurt our pension liabilities. But the returns in the stock market have more than offset the rise in liabilities.
"We've increased our funded ratio. It's now more than 120%."
For 1999, the company is keeping its assumed rate of return on assets at 9%, the same as it was last year and a half percentage point lower than 1997.
The company lowered its discount rate. But these figures and other impact details were not immediately available.
Mr. Gulliver said the historic low level of interest rates could dampen or erase entirely any pension income gains sponsors could expect from the huge historic rise in the stock market.
"We've never seen interest rates this low," he said.
He pointed out the 30-year Treasury bond is at its lowest level since it was first issued in 1977.
Interest rates are the lowest they've been since the 1974 passage of the Employee Retirement Income Security Act and the 1986 adoption of Financial Accounting Statement 87, he noted.
"The funded status of plans hasn't necessarily improved," Mr. Gulliver said. "So it isn't clear market gains have been as beneficial as they seem. "For well-funded plans, the news has gotten better. For poorly funded plans, the news has gotten worse," he said.
Mr. Gruschow said, "It's hard to make a generalization on the impact to pension funding."
Only very well-funded plans are likely to benefit from the market gains, he said, because they have more assets to invest.
Lucent Technologies Inc., Murray Hills, N.J., used the huge market gains its plan has built up since 1986 -- including some years when the company was part of AT&T Co. -- to report $1.3 billion in pension income on its corporate income statement for the quarter ended Dec. 31.
Lucent used a less conservative actuarial methodology to speed recognition of investment gains of its pension assets. The move gave a huge one-time boost to its pension income, which it could, in turn, report as part of its corporate income statement for this year. Also, the move is expected to provide $170 million in additional pension income in ensuing years by recognizing investment gains faster than the amortization previously used.
Lucent, as of Sept. 30, had $36.2 billion in pension assets and $27.8 billion in pension liabilities.
The company lowered its discount rate to 6% from 7.25%.
It hasn't had to make any pension plan contributions because of its overfunding and doesn't expect the need to arise this year, a spokesman said.
"I expect other companies may be examining doing something similar," Mr. Gruschow said.
Most companies amortize recognition of gains and losses over several years, he said. Lucent will continue to amortize them, although it will recognize them a little sooner under its change.
Only 27% of companies use market value in recognizing gains and losses immediately, Mr. Gruschow said. These companies will feel any stock market or interest rate moves right away.
Most others use an actuarial method, typically taking only 20% of gains or losses on investments every year.
"But I don't think the market gain is going to drive an actuary to raise funding rate assumptions," he added.
Both Messrs. Gulliver and Gruschow distinguished between the FAS assumption rates, which affect corporate financial statements, and the rate of return assumption, which is used for determining contributions, based on rigid Internal Revenue Service guidelines.
The latter IRS rate is a range based on a four-year average of the 30-year Treasury bond rate and has been falling as interest rates continue to decline.