Pension crisis overblown, survey suggests

(July 7, 2004) North America’s defined benefit pension (DB) plans are improving their financial positions, according to a new survey, and they should fare even better as interest rates rise.

Toronto-based Dominion Bond Rating Service studied the DB plans of 296 North American companies in 16 industries. It found that although certain companies do have problems, “the position of North American pension plans is not nearly as significant a problem as it is made out to be.”

The study found that the number of companies with underfunded pension liabilities improved in 2003 to 57% from 51%. However, Dominion notes that low interest rates are the main reason that some DB plans are in a deficient position.

“Most plans that are currently over 80% funded would be balanced or in a surplus position if long-term interest rates rose by 200 basis points, an event that is likely to happen,” the rating agency says.

In addition, many pension plans have reduced their expected rate of return to a more conservative 8% to 8.5% range and wage costs have slowed dramatically, “which greatly diminishes future pension liabilities.”

Health and insurance benefits are a far greater problem for U.S. companies than pensions, the survey concludes, adding that health and insurance liabilities are currently three to four times larger than pensions, with health costs rising 9% to 11% annually.

Dominion has upgraded the pension classifications of a number of industries — including manufacturing, mining and forest products — to “middle exposure,” meaning some exposure exists, but it is not serious.

Most industries are now in the “insignificant exposure” category, including insurance, retail, merchandising and oil and gas. Only auto parts companies remain in the lowest “significant exposure” category, Dominion says, with pension issues that have yet to be addressed.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com