From the August 2008 issue of Research Magazine • Subscribe!

Study Finds Some Plans in Good Shape

There's good news for your clients enrolled in pension plans at the largest U.S. companies.

According to a Mercer study, in 2007, the financial health of pension plans at these companies improved for the second straight year, with aggregate pension assets exceeding aggregate pension liabilities for the first time since the end of 2001. 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 year-end 2007, up from 89 percent at the end of 2006.

In the report "How does your retirement program stack up? - 2008," Mercer analyzes retirement program data disclosed by the S&P 500 companies in their 10-K reports for 2007. The analysis enables companies to better understand how pension costs affect their overall cost structure, risk profile, and competitive position. "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," says 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, 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."

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 FY 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.

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