Funding gains don't alter outlook: study.

Despite an increase in the funding ratios of U.S. pension plans, the overall outlook for defined-benefit (DB) plans remains gloomy, suggests research by Greenwich Associates. Many plan sponsors "appear to be shoring up their plans with an eye toward eventually winding them down," the firm says.

Relatively strong market returns and a slight upward move in interest rates contributed to an increase in average funding and solvency ratios for corporate and public pension funds last year, and drove endowment assets' growth rate to 7.7 percent. Yet, rather than allay concerns about the long-term health of U.S. DB plans, "the results of 2005 provide a clear demonstration of plan sponsors' need to wring ever-higher levels of return," Greenwich notes.

For the typical large U.S. DB plan, the funding ratio on accumulated benefit obligations increased from 95 percent at the start of 2004 to 99 percent at the beginning of 2005, while funding of projected benefit obligations rose from 88 percent to 91 percent. Over the same period, the average solvency ratio of public DB plans increased from 87 percent to 89 percent.

These findings stem from Greenwich Associates' 2005 Investment Management research, for which the firm interviewed 1,050 U.S. institutional investors, including 580 corporate pension plan sponsors, 225 public plan sponsors, and 214 endowments.

"The strategies that plan sponsors are adopting are well-thought-out and appropriate, including increased investment in international stocks and certain alternative asset classes," says Greenwich Associates consultant Dev Clifford. He adds, however, that any hopes of using these new strategies to fund most of their pension obligations through investment returns are probably too optimistic, and that "what we might instead be witnessing is an effort to get their pension houses in order before winding them down."

This exit-strategy idea showed up in the data. The proportion of U.S. corporate DB plans closed to new employees increased from 19 percent in 2004 to 22 percent, and the largest plans appear to be closing at an accelerating rate. The percentage of $5-billion-plus funds closed to new employees rose from 13 percent in 2003 to 22 percent in 2005, the research found.