As the stock markets rose, sponsors of corporate defined benefit pension plans realized significant gains in the funded status of their plans in 2009, according to a report by Mercer LLC. But the consulting firm warned that the gains could erode if market volatility returns.

Funded status improved during 2009 and stood at 85 percent at the end of December of that year, according to figures from Mercer. That's up from a 75-percent funded status at the end of December 2008. During the same period, total pension plan deficits improved from $409 billion to $229 billion.

"This will be welcome news for plan sponsors," remarked Adrian Hartshorn, a member of Mercer's financial strategy group. "The improved funded status will add $180 billion to the balance sheets of U.S. companies, which, over time will improve earnings and reduce the need for future cash contributions."

Despite the sunny outlook, storm clouds threaten. Hartshorn warned that some companies may face increased cash contributions or higher Financial Accounting Standard pension expenses because of smoothing methods that deferred 2008 losses.

Most plan sponsors continue to have assets invested mainly in equities, the Mercer analysis showed. Equity returns are volatile and have a relatively low correlation to the changes in value of plan liabilities, compared to liability hedging assets such as bonds, Mercer said. As a result, the funded status of pension plans is likely to remain volatile.

For more on pension plan funding, see the Pension Plan Fix-It Handbook from Thompson Publishing Group.