News & Information

 

FEATURE PRODUCTS

The U.S. Master Pension Guide reflects the latest regulations, rulings and cases for qualified retirement plans, surveying the different type of plans from which an employer may choose, and describing the procedures for obtaining plan qualification.

Learn More »

CCH® PENSION AND BENEFITS — 7/4/08

Funded status of DB plans improves for second straight year, Mercer study shows

In 2007, the financial health of pension plans at the largest US companies improved for the second straight year, with aggregate pension assets exceeding aggregate pension liabilities for the first time since the end of 2001, according to an analysis by Mercer, “How does your retirement program stack up? – 2008.” Aggregate pension plan assets of $1.56 trillion exceeded aggregate pension liabilities of $1.50 trillion in 2007 for the first time since year-end 2001, when aggregate pension plan assets of $951 billion backed pension obligations valued at $929 billion.

The funded status of pension plans sponsored by companies in the S&P 500 improved due to net asset returns generally exceeding expected 2007 targets, along with a 30 to 50 basis point increase in the discount rates used to value the actuarial pension liabilities. This combination helped to improve the median funded status for individual pension plan sponsors in the S&P 500 to 94 percent at fiscal yearend 2007, up from 89 percent at the end of 2006.

PPA requires new funding targets

“Retirement programs, including traditional defined benefit pension plans, are an important, and integral, part of a company’s financials as well as a key human resource strategy, but they operate in a changing landscape,” said Steve Alpert, a principal and consulting actuary with Mercer and primary author of the study. “This year, plan sponsors are preparing for the 2008 start-up of new funding rules under the Pension Protection Act of 2006 and assessing and managing the effects of accounting changes required by FAS 158. Many will be looking at their pension and post-retirement plans from a financial risk perspective, and taking an integrated approach to managing those risks.”

The overall improvement in funding status, as reported on companies’ balance sheets, carried over to Mercer’s estimate of the new funding target required by the Pension Protection Act of 2006 (PPA). At the median, the new funding target is estimated to be more than 100 percent funded, which means that many pension sponsors will not be required to contribute in 2008 any more than the value of benefits earned during the year.

Plan sponsors continue to take investment and interest rate risk with their pension portfolios, and most still have more than 60 percent of pension assets invested in equities. These sponsors were rewarded with actual asset returns during fiscal year 2007 of 9.6 percent, outpacing both the expected asset return assumption (8.25 percent) and the liability return (3.3 percent) at the median. Asset returns for 2007 were not as strong as actual 2006 asset returns, which were 13.3 percent at the median, but funded status nevertheless improved significantly, largely due to the increase in the discount rate used to calculate the liabilities.

Market volatility affects outlook for 2008

“As we move forward in 2008, the capital markets and the economic environment remain volatile,” said Richard McEvoy, a principal in Mercer’s Financial Strategy Group. “With equities generally falling in value and discount rates rising, projected yearend pension funded status is difficult to predict at this point. With mark-to-market valuation now required for both funding and balance sheet recognition, the calculus for deciding on the mix and level of defined benefit and defined contribution benefits is changing.”