The funding shortfall of S&P 500 firms with defined benefit plans remained unchanged at a combined $164 billion at the end of 2004 — despite double-digit stock market gains, according to Standard & Poor's annual pension status report. The underfunding for the 369 S&P 500 companies that offer DB plans was $165 billion at the end of 2003. Preliminary numbers S&P released to Pensions & Investments in early May had the firms with a combined $161.9 billion at the end of last year.
"What hurt the pension funds and at the same time surprised just about everybody was the fact that interest rates stayed low and in fact got a little lower," David Blitzer, S&P managing director and chairman of the index committee, said in an interview. The low interest rates offset solid stock market gains, he said.
The level of underfunding is likely to improve slightly this year but remain in the $140 billion to $150 billion range, with an expected small increase in interest rates forecast, Mr. Blitzer said.
According to the report, pension assets grew 13.6% in 2004 while liabilities grew 11.8%. Of the 366 S&P 500 plans that reported full pension data, 55 were overfunded and 311 were underfunded.
"Going forward, unless the financial markets turn around dramatically differently than most people expect, the difficulties remain," Mr. Blizter said. However, the report did not suggest that "doomsday is tomorrow. Except for a few infamous spots, pension funds will write checks to beneficiaries and the checks won't bounce," he said.
Pension funds are likely to continue moving assets into both bonds and alternative investments, particularly hedge funds, despite the tepid returns of late, and real estate he added.
Still, "nobody's found the magic formula to get out of this box," Mr. Blitzer said. "Nobody wants to be reminded that 1982 through 2000 was an incredible 18-year run in the U.S. stock market, but we're beginning to realize how incredible it was."