The median funding level of pension plans of publicly traded U.S. electric and gas utilities was 86% at the end of 2004, compared with 79% two years earlier, according to a new Fitch Ratings report. The increase was mostly a result of strong investment returns, along with company contributions, the report said. "It is troubling that funding levels did not improve more substantially despite significant recovery" in investment indexes, according to the report. Ellen Lapson, a managing director with Fitch, said the firm would have expected even greater improvements, given the positive recent performance in securities markets and increases in employer contributions.
Citing "very modest investment returns" during 2004, the report said "it would not be surprising to see funding levels drop in 2005." Fitch analysts believe companies will need to continue making "high" pension contributions.
Ari Kagan, a director in Fitch Ratings' global power group, said in a statement that "no near-term rating actions due to underfunded pensions are likely." He noted in the statement that some utilities may be able to apply for higher tariffs to recoup pension expenses, and an underfunded pension plan "does not necessarily imply that cash distributions will be required immediately."