More than two-thirds of U.S. defined benefit plan sponsors would consider freezing their plans if new accounting rules eliminated smoothing, according to a new survey by Towers Perrin. Also, 62% would consider freezing their plans if Congress enforces tighter funding requirements.
The survey of about 100 financial executives examined how those officials view their pension plans and the financial risk the plans pose to the company, according to Cecil Hemingway, principal and head of the Legacy Pension Solutions unit at Towers Perrin.
"What became clear is that the view of the risk a pension plans presents to the corporation is evolving," he said. "Our sense is companies are very much at the beginning of the (decision-making) process, trying to absorb what just happened, trying to absorb regulatory changes that are on the horizon."
Mr. Hemingway said many plan sponsors are still coming to grips with a significant loss in pension assets as a result of the bear market in stocks, combined with falling interest rates. He noted that the Towers Perrin benchmark pension plan, for example, was 130% funded on a projected benefit obligation basis at the end of 1999 but only 84% funded as of Feb. 28, 2006.
"If you translate that into dollars, you're talking about billions of dollars of value that evaporated," Mr. Hemingway said.
Company officials are not at the point where major pension decisions are imminent but instead are evaluating their plans and whether the combination of falling stocks and interest rates could happen again.
"Companies are very much at an almost basic level understanding what is the risk and how do they measure it," Mr. Hemingway said. "They're doing some scenario analysis."
The survey found that financial executives are not satisfied with the solutions currently available to minimize pension fund risk, such as freezing plans, annuitizing them, altering their asset allocation or cutting operational costs.
"I think they've found that there are no silver bullets," Mr. Hemingway said. "Most solutions have some kind of tradeoff" between reducing risk and its cost.