Pensions at the Standard &Poor's 500 pension plans took on a healthy glow in 2006 thanks to strong equity returns and lower bond yields. The S&P 500 managed to slice nearly 75% of their underfunded status in the year just ended, closing out the year with $36.4 billion in underfunded liabilities vs. $140.4 billion at the end of 2005. The funding ratio status is expected to stand at 98% by yearend 2006, vs. the 90% funded status at the end of 2005, estimates Howard Silverblatt, senior index analyst at the Standard & Poor's, thanks to the run-up in equities that began at the end of the fourth quarter and the mild up-tick in interest rates. The current run-up in funding, however, is still a long ways off from the heady days of 1999, when the funded status at S&P 500 pensions reached 128.2%. Still, the number of fully funded plans nearly doubled to 82 by yearend, from 47 in 2005. "Sometime this year, S&P 500 pensions will again be overfunded–on paper," says Silverblatt, based on S&P's current projections for the equities and interest rates. S&P is forecasting that the S&P 500 stock index will end 2007 at around 1510 and that interest rates will remain below 6%.

Nevertheless, cautions Silverblatt, some dark clouds remain, particularly other post-employment benefits such as prescription drug benefits to retirees, or OPEB. OPEB was underfunded in 2005 by $321 billion; in 2006, it was $292 billion. While the assets backing the OPEB liabilities barely budged, remarks Silverblatt, OPEB obligations declined from $412 billion to $385 billion. "Companies moved over to Medicare Part D plans to provide drug coverage to their retirees, and companies capped their expenditures," says Silverblatt. "Liabilities are down–but then again so are the benefits [being provided to retirees]. But the bottom line is that that combined amount of both pension and OPEB underfunding was $461 [billion in 2005], down to $329 [billion in 2006]." Still, Silverblatt points out that companies are not out of the woods yet, especially when it comes to their OPEB obligations. But at the bottom, he adds, the issue is as much a political issue as it is an economic one. "Ultimately the pension crisis [is likely to] be resolved in Washington and on the campaign trail, where healthcare is a hot topic."

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