Corporate Pensions Had Strong Year, Study Says

The nation's corporate pension funds had a healthy 2006, buoyed by stronger-than-anticipated returns from the stock market and slower-than-anticipated growth in expected payments to retirees.

That's the conclusion of the Milliman consulting firm after reviewing the 100 biggest companies that offer pension plans. The companies manage $1.3 trillion in pension benefits, about 75 percent of traditional-pension money in the U.S. private sector.

Last year, Milliman and other pension experts predicted that the net worth of many companies offering traditional pensions would fall because of accounting rule changes that took effect in 2006. The rules require a company to reflect on its balance sheet the market value of all pension assets and obligations, rather than just those payouts that affect its earnings for the year.

But the stock market performed better than expected -- offering average returns of 12.8 percent, rather than the 8.4 percent the consultants predicted -- meaning the funds' stated ability to pay future expenses was not hurt by the new rules as much as was predicted a year ago, reported the Milliman study, which was released yesterday.

Milliman actuary Adrien LaBombarde said that on average, "pension funds look pretty good right now." But he said some companies, especially in the troubled auto and airline industries, continue to worry the federal Pension Benefit Guaranty Corp. The PBGC guarantees payouts, up to a point, for retirees owed money from a failed pension plan.

Still, LaBombarde said, corporate pensions are "essentially fully funded." The nation's pensions look even healthier once pensions for top executives and foreign workers -- which are unfunded because of unfavorable tax laws -- are subtracted, he said.

The new accounting rules were one of two major changes affecting companies with traditional pension funds last year. The Pension Protection Act, passed last summer, tightens pension-funding policy, ending the practice that has allowed companies to promise employees money at retirement without setting the assets aside to fund that promise.

The traditional pension, also known as a defined-benefit plan, is typically funded entirely by an employer and offers a steady monthly income or a lump sum upon retirement, based on age, salary and years of service.

Over the past seven years, companies have been forced to put more money into pensions to compensate for lower-than-anticipated returns on investments. As a result, employers have increasingly embraced other options, especially defined-contribution plans, the most common of which is the 401(k). Under such plans, employees, employers or both contribute to employees' individual accounts and employees take on the risk and responsibility of investing the money.