Funding in pension plans improved slightly last year, according to a report by S&P Indices, but remain “significantly underfunded.”

According to the report, S&P 500 defined pension plans rose to 81.65% from 78.1% a year earlier, but remains significantly underfunded by $260 billion. The report, paints an equally dark picture for Other Post Employment Benefits, which remains severely underfunded at $214 billion in shortfalls.

According to the report, estimated pension return rates continued to decline to 7.83% from 7.95% a year earlier, posting their ninth consecutive year of decreases since the rate was 9.17% in 1999.

Discount rates declined 58 basis points to 5.81% last year.

"For the year, even the best equity market in over a decade could not overcome the combined reduced returns from asset reallocation, higher obligations, and previous market losses," said Howard Silverblatt, an S&P senior index analyst who wrote the report.

The S&P Indices report also reviewed the status of Other Post Employment Benefits. Within the S&P 500, 293 companies - flat from 2008 and down from 310 companies in 2007 - offer OPEBs, with the aggregate underfunding of $214.6 billion representing a 22.2% funding rate, up from 20.3% a year earlier.

"Companies continue to cut back on OPEBs and are now introducing multitier benefit programs for new employees," Silverblatt said. "OPEB benefits for many current retired workers, that collective bargaining agreements don't cover, are coming under additional stress as alternative public programs become available. As these alternative plans develop, companies are likely to introduce them, which will, directly or indirectly, shift more of the financial burden and responsibility to the retiree."

Combined, pension and OPEB assets that S&P 500 companies have set aside last year amounted to $1.22 trillion to cover just under $1.70 trillion in obligations, with the resulting underfunding by 28%, down from 32.7% a year earlier.

As for this year, Silverblatt's current baseline estimate calls for pensions to improve from their current level of funding, ending the year at $205 billion underfunded.  

"Year after year the story remains the same: neither the public nor the private sector has shown a tolerance for the pain associated with the type of forward action needed to address the U.S. pension problem,” he said. “The longer the situation goes unaddressed or short-term band-aids are applied, the stronger the measures will have to be to solve the situation.”

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