BETHESDA, Md. Corporate pension plans improved their funded status in 2006, according to a newly released membership survey by the Committee on Investment of Employee Benefit Assets, an affiliate of the Association for Financial Professionals.
Plans reported an average funded status of 103% on an accumulated benefit obligation basis, up from 99% in 2005 and 98% in 2004. Thats a big improvement from the low 90% range in 2001 and 2002, said William F. Quinn, chairman of CIEBA, in an interview.
Pension plans have come back strong and are fully funded on average now, said Mr. Quinn, who is also chairman and chief executive officer of American Beacon Advisors, Fort Worth, Texas, which manages the $9 billion defined benefit plan of American Airlines Inc. as well as Americans $7 billion in 401(k) assets.
CIEBA surveyed 112 corporate plan sponsors responsible for $966 billion in defined benefit plan assets and $573 billion in defined contribution assets. Plans in the survey, conducted in spring 2007, covered 11.5 million defined benefit plan participants and 5.6 million defined contribution plan participants.
The increase in the plans funded status was largely due to strong investment returns, according to the survey. Defined benefit and defined contribution plan assets increased by 9% and 11%, respectively, in 2006.
Another reason for the boost was increased employer contributions. The survey found that defined benefit plan sponsors contributed $27 billion to their plans in 2006, up from $23 billion in 2005.
Plans are better funded than people thought they were, Mr. Quinn said. Sponsors remain committed to putting significant amounts of assets into plans.
A majority of companies surveyed (94%) sponsor both defined benefit and defined contribution plans. Defined benefit plans were bigger, covered more participants and paid out more than defined contribution plans, the survey found. Defined benefit plans had 68% more assets than defined contribution plans, covered 108% more participants and paid out 53% more in benefits. Of the total $119 billion in benefit payments in 2006, $72 billion was paid out of defined benefit plans and $47 billion was paid out of defined contribution plans.
In terms of the defined benefit plans asset allocations, CIEBA saw a slight increase in fixed income in 2006 compared with 2005. Mr. Quinn said the increase was most likely due to more plan sponsors focusing on liability-driven investments and, therefore, moving more to bonds.
With defined contribution assets, diversified equity allocations increased slightly from 2005, offset by a decrease in fixed-income holdings. Company stock holdings were the same as 2005, representing a leveling off after several years of decline.
Almost all of the defined contribution plan sponsors (98%) offered lifecycle or balanced fund investment options and 46% offered individual financial planning assistance or interactive advisory programs.
The survey found that 13% of defined benefit assets were managed internally.