The combination of plunging equity markets and falling long-term interest rates that hit pension funds from 2000 to 2003 has been called a "perfect storm" by many observers. But anybody who has read the book or seen the movie by that name can tell you there were no survivors.
In 2004, there were plenty of survivors, belying the perfect storm theme. But another tempest is developing, and the question now is whether there will be any defined benefit plans.
This time, though, the threat stems more from volatility of pension contributions, tougher accounting standards and a harsh regulatory environment than from deteriorating markets.
In 2004, the tide turned for defined benefit plans. Officials at United Airlines, Chicago, said the company needs to terminate its severely underfunded pension plans to survive. The plans, with a combined $6.9 billion in assets, were only 55% funded as of Dec. 31, 2003, according to a federal filing. The Pension Benefit Guaranty Corp., facing its own $23 billion deficit, moved to shut down the $2.8 billion United pilots' plan, which is 49% funded, according to PBGC estimates.
Ryan ALM Inc., New York, estimates that, overall, pension funding ratios did not improve much or even deteriorated slightly, depending on which measure is used. Overall, the firm estimates that most U.S. pension funds are about 60% funded.
Meanwhile, in December, International Business Machines Corp., White Plains, N.Y., closed its controversial cash balance plan — the next best alternative to the traditional defined benefit plan — to new employees, casting a pall over the future of these plans.
And now, all of California's public pension plans — including the giant California Public Employees' Retirement System and the California State Teachers' Retirement System, both in Sacramento — face the threat of being closed to new participants under a constitutional amendment backed by Gov. Arnold Schwarzenegger.