For all the talk about the fragility of the defined benefit (DB) plan, predictions of its death may have been premature. In fact, thanks to higher interest rates, improved equity returns and increased corporate contributions, many plans have come off the critical list and a few are fairly glowing from a transfusion of market gains, according to a recent analysis of Fortune 1000 companies with DB plans. That study, by Watson Wyatt Worldwide Inc., shows the number of big companies at serious risk because of underfunded pension obligations declining sharply in 2005, to 9% from 13% the year before and 17% in 2003. Even more impressive, Watson Wyatt now expects the aggregate funding status of these plans–pension assets versus liabilities–to hit 100% in 2006, up from 92% in 2005 and 82% in 2002.
Things have improved so substantially that some experts are even suggesting that the DB roller-coaster ride may finally be coming to an end. “There’s been pretty much a return to health,” says Mark Warshawsky, director of retirement research at Watson Wyatt. Ironically, he attributes the renewed vigor to the Pension Protection Act (PPA), which was so roundly criticized when it became law late last year, and a subsequent reduction in corporate contribution volatility. “We’ve done an analysis, comparing the old law with the new law, and we find–and this is exactly the opposite of conventional wisdom–that the new law actually leads to less volatile contribution requirements,” asserts Warshawsky. The main reason, he says, is simple: The new law gives a company seven years to make up additional funding, where the old law allowed only three or four.
That said, there are still forces working against traditional DB plans, including the fact that the PPA also established cash balance plans as a legal alternative and the courts so far are rejecting the assertion that cash balance plans are inherently age discriminatory. Of course, what the market giveth, it can easily take away. The difference now is that the PPA gives companies a more workable blueprint to get back on track.