Pensions are in better shape than is often reported, according to Dominion Bond Rating Service.

In its updated annual study, DBRS says that the proportion of companies reporting underfunded pension liabilities (below 80%) increased “modestly” in 2003 to 57% from 51% and nearly all companies reported a significant increase in pension expense.

DBRS also notes that pensions are using more conservative assumptions: about 50% of companies reduced assumed returns on assets to returns closer to 8% vs 8.5% to 9% or more in 2002; and, about 60% of companies reduced the assumed discount rates used on pension liabilities to levels closer to 6.25% from general levels near 6.75%, which added to the pension deficiency. DBRS says that these two factors offset the fact that investment returns in 2003 reached 16% to 17% for many companies (due to a recovering stock market), which reduced the pension deficiency.

“The pension issue for defined benefit pension plans is a problem in only some industries and is generally being over-emphasized as an issue in credit ratings,” it says.

DBRS is upgrading the pension classification of some industries relative to the 2003 study, thereby reducing the pension risk of these industries. The U.S. electric utilities and oil and gas sectors were upgraded from middle exposure to insignificant exposure. Industries moving into the middle exposure category, from significant exposure, are: auto companies, manufacturing, mining and forest products. This leaves only auto parts companies still in the “significant exposure” category.

But DBRS says there are still individual companies with pension difficulties. While underfunding is the general concern related to pensions, the agency notes there are other issues related to pensions that will cause specific concerns to individual companies that are not addressed in this study, such as problems with defined contribution plans and vesting.

The study, which covers the defined benefit pension plans of 296 companies across 16 industries, also found: pension deficiencies are volatile; only a few industries are greatly affected by significant pension liabilities; the pension “problem” is cyclical; and, Canadian pension plans have significantly more conservative assumptions than the U.S. plans.