CFOs Say Pension Plan Financial Performance is Now a Board Level Issue, According to Towers Perrin Survey; Majority of CFOs Report That Their Company Pension Plans Are Underfunded.

Business Editors

NEW YORK--(BUSINESS WIRE)--Oct. 20, 2003

Pension plan financial performance is now a board-level issue in almost 90% of major U.S. companies, according to a recent Towers Perrin survey of chief financial officers of Fortune 1000 companies that sponsor defined benefit pension plans. Chief Financial Officers now see a heightened concern about pension plan financing in the executive suite and boardroom, reflecting the toll that depressed stock values and declining interest rates have taken on corporate pension plans during the previous few years.

The survey, "The Towers Perrin 2003 CFO Survey: Pension Plan Financial Results Come Under the Corporate Microscope," also found that approximately three-quarters of the U.S. CFOs who participated in the survey reported that their companies' pension plans are now underfunded.

"Senior leaders and financial executives in most major companies are now putting their pension plans' financial performance under the microscope. They are making an effort to better understand the pension environment and its relationship to the overall financial performance of their businesses," said Steve Kerstein, Managing Director of Global Retirement Consulting services. "They are also ensuring that their pension benefit, funding, investment and accounting policies are properly coordinated and managed to support their companies' broader business objectives."

Key Concerns

The survey confirms that many corporate leaders are becoming more interested in pension plan financial performance. This growing interest and concern over pension financing is readily understood in light of a recent Towers Perrin analysis of pension plan financial performance for 300 Fortune 1000 companies that offer pension plans.

The analysis found that the average funded status of the pension plans studied declined from 120.2% at the end of 1999 to just 77.5% by the end of 2002. It also found that the average pension cost reflected on the income statement was $23.8 million for 2002, a reversal from prior years when companies were reporting pension income.

Perhaps more worrisome, the average deferred pension cost for the 300 companies studied almost tripled from 2001 to 2002, to almost $1.4 billion. Given these significant developments, CFOs of U.S. companies are now facing serious concerns about pension financing, including:

-- 40% say pension plan financial performance is of significant

concern to their companies' CEO.

-- 26% say it is of significant concern to their Board of

Directors.

-- 20% believe it is a significant concern to company employees

(although, interestingly, only 10% think it is of significant

concern to their shareholders, lenders or the SEC.)

-- 24% said deferred pension costs and their potential impact on

total shareholder value are a significant concern for their

companies.

-- 18% have significant concerns about the impact of higher

pension expense levels on their company's ability to meet

future earnings targets.

"Surprisingly, only 14% expressed concern that the financial condition of their pension plans might impair the company's ability to pursue business transactions such as mergers, acquisitions or divestitures. It's worth noting, however, that unfunded liabilities can become a highly contentious issue in merger negotiations," said Kerstein.

Corporate Leaders Even More Concerned in Europe

A parallel survey conducted in August of chief financial officers of large European companies found even higher levels of concern about pension financial issues in Europe. For example, of the 77 European CFOs surveyed:

-- More than half (57%) said pension plan financial performance

was a significant concern for their board of directors.

-- Almost half (44%) said it was a significant concern for

company employees.

-- More than half (53%) said that pension plan financial issues

have affected their assessments of key business transactions,

such as mergers and acquisitions.

"The heightened concern among European financial executives stems from the current movement toward market-based accounting systems for pensions in Europe," Kerstein observed. "U.S. companies have had 15 years of experience with Financial Accounting Standard 87, the primary U.S. pension accounting standard, and are used to its market-based methodologies. The higher level of anxiety about pension plan financing in Europe could be a result of Europeans' relative unfamiliarity with the new accounting rules being introduced across Europe. U.S. companies have more experience understanding the financial volatility from pension plan reporting."

Taking A Long-Term View in the United States 

Despite the current financial challenges, the survey findings suggest that most U.S. corporate leaders are resisting the urge to cut pension benefits or modify their plan's investment strategies to improve financial results in the short term. Instead, the U.S. CFOs surveyed appear to be taking a long-term view of pension plan financial issues that is consistent with the long-term nature of pension obligations and investment horizons.

When asked about the key factors their companies take into account in setting investment policies for their pension assets, 82% of the U.S. CFO respondents said long-term investment return expectations are very important while only 4% said short-term investment return expectations are very important and 50% placed no importance on short-term expectations. Importantly, 90% of these CFOs said pension plan design is important, with 38% citing it as very important.

"The emphasis on long-term investment return is appropriate given the long-term nature of pension plan financial commitments. However, this orientation can sometimes seem out of sync with the interests of financial analysts and shareholders who are focused on short-term reporting and results. With growing deferred pension costs threatening to further erode many companies' future financial performance, it remains to be seen if corporate leaders will be able to stay the course with respect to plan benefits and investments," said Kerstein.

"Companies that have a clear strategy for managing their pension costs and risks are better positioned to actively articulate their pension story to their key stakeholders rather than leaving it to the financial community to tell their story for them. They also will be better positioned to participate in the continuing debate over pension accounting and funding rules."

Accelerating the Continuing Shift in Europe

By contrast, the results of the Towers Perrin survey of the European CFOs suggests that the unfavorable pension plan financial performance of the past few years may have the result of accelerating the ongoing shift from defined benefit pensions to defined contribution retirement plans in many European countries. In fact, more than two-thirds (70%) of the European CFOs surveyed believe that more than half of European companies will offer only defined contribution plans within the next five years.

"This shift would mark a dramatic turnaround from a few short years ago, when defined benefit pensions were standard at most large European companies," Kerstein said. CFOs of companies headquartered in the U.K., Germany, France, Spain, the Netherlands, Belgium and Norway participated in our European survey.

Towers Perrin is one of the world's largest management, human resource consulting and administration firms. It helps organizations manage their investments in people to achieve measurable performance improvements, focusing on human resource strategy and service delivery, benefit and compensation design and implementation, employee and organizational communication, HR technology and outsourced administration. Towers Perrin is part of a broader family of businesses that also includes Tillinghast - Towers Perrin, a management consultancy for financial services companies worldwide, and Towers Perrin Reinsurance, a reinsurance intermediary and consultancy. Together, these businesses have over 9,000 employees and 79 offices in 77 cities and 24 countries. More information about Towers Perrin is available at www.towersperrin.com.

Editors Note: Copies of the report and charts illustrating the findings are available from the Towers Perrin Press Relations office. Contact Joe Conway at 914/745-4175 or via e-mail at [e-mail].