2007 a Good Year for Large Company DB Plans

June 11, 2008 (PLANSPONSOR.com) - 2007 was very kind to the defined benefit pension plans at the largest U.S. companies, according to a new study.

In a news release Mercer said its analysis showedthe financial health of pension plans sponsored by companies in the S&P 500 improved for the second straight year in 2007, with aggregate pension assets surpassing aggregate pension liabilities for the first time since the end of 2001. Mercer said the research shows aggregate pension plan assets of $1.56 trillion exceeding aggregate pension liabilities of $1.50 trillion in 2007.

The funded status improved due to net asset returns generally going past 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% at fiscal year-end 2007, up from 89% at the end of 2006.

class=”NormalIndent1″> 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% funded.

class=”NormalIndent1″> Mercer also reported that sponsors continue to take investment and interest rate risk with their pension portfolios, and most still have more than 60% of pension assets invested in equities. These sponsors were rewarded with actual asset returns during FY 2007 of 9.6%, outpacing both the expected asset return assumption (8.25%) and the liability return (3.3%) at the median.

class=”NormalIndent1″> Asset returns for 2007 were not as strong as actual 2006 asset returns, which were 13.3% at the median, but funded status nevertheless improved significantly, largely due to the increase in the discount rate used to calculate the liabilities.

“Plan sponsors who invest in equities are betting that expected superior returns of these investments will offset the growth in plan liabilities. However, they may find that the risks of doing so outweigh the rewards – either because the risk to funded status is too large relative to other business risks, or the plan is funded well enough that outperformance may result in unproductive or trapped surplus that the company can’t use,” said Richard McEvoy, a principal in Mercer’s Financial Strategy Group, in the announcement.

In the report, How does your retirement program stack up? – 2008, Mercer analyzes retirement program data disclosed by 377 S&P 500 companies in their 2007 10-K reports.