Even though U.S. pension managers saw their funding ratios improve in 2005, as they juggled their asset allocations in search of higher returns, many may be simply preparing to wind up their plans, suggests new research from Greenwich Associates.

“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 while propelling endowment assets to a growth rate of 7.7%,” Greenwich reports. However, it indicates that, “These improvements did little to allay concerns about the long-term health of U.S. defined benefit plans. Rather, the results of 2005 provide a clear demonstration of plan sponsors’ need to wring ever higher levels of return out of their investment portfolios.”

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

These gains can be attributed in large part to three trends working in pensions’ favor, the firm said: strong returns from investment markets, positive net contributions and rising interest rates that decreased the present value of their future benefit obligations. “Thanks to relatively robust markets and at least a slight decline in future obligations, U.S. pension plan sponsors made some progress last year,” says Greenwich Associates consultant Rodger Smith, “but the improvement in pensions’ health should not be overstated. Nearly a quarter of corporate defined benefit funds still have projected benefit obligations funded less than 85%.”

Greenwich maintains that the modest gains achieved last year will do little to address the demographic and economic problems that are driving many U.S. corporate plan sponsors to close their DB plans to new employees and even adjust benefits for existing workers and retirees. The proportion of U.S. corporate defined benefit plans closed to new employees increased to 22% from 19% in 2004, and the largest plans appear to be closing at an accelerating rate, it reports. “The percentage of funds with assets of more than $5 billion that are closed to new employees increased from 13% in 2003 to 22% in 2005”, says Greenwich Associates consultant William Wechsler.

Still, it notes that pension plan sponsors are taking steps to try to boost returns and improve their funding situations, including shifting assets into international equities and alternative asset classes including hedge funds, equity real estate, and private equity. However, it suggests that these moves may simply be the preamble to more plan closings.

“The strategies that plan sponsors are adopting are well thought out and appropriate, including increased investment in international stocks and certain alternative asset classes, and the growing use of absolute return and portable alpha strategies,” says Greenwich Associates consultant Dev Clifford. “But thinking that shifting assets from U.S. equities into these products will enable defined benefit plan sponsors to fund the bulk of their looming pension obligations through investment returns might be a case of hope triumphing over experience. What we might instead be witnessing is an effort on the part of corporate plan sponsors to get their pension houses in order before winding them down.”

The firm’s conclusions are based on the results of research, for which Greenwich interviewed 1,050 U.S. institutional investors, including 580 corporate pension plan sponsors, 225 public plan sponsors, and 214 endowments.