DB Discount Rate Reductions May Be in Order for 2010

December 17, 2010 (PLANSPONSOR.com) – The range of discount rates being used by defined benefit plan sponsors continues to widen compared with past years with a 2009 range for pension disclosure that is 20 basis points wider than the previous year.

A news release from SEI about its latest study of the issue said there was a 161-basis-point range for the 2009 rates. Some 90% of companies with defined benefit plans in the 2009 SEI Plan Sponsor Accounting Database (over 650 sponsors reporting) set their discount rates in their 2009 pension disclosure between 5.27% and 6.88%.

According to the SEI news release, assuming no changes in December 2010, plans with a December 31 measurement date should consider decreasing their discount rates.

“Last year most companies lowered their discount rate; however, some plan sponsors actually increased it, thus widening the range,” said Jon Waite, Director, Investment Management Advice and Chief Actuary for SEI’s Institutional Group, in the news release. “The wide range of discount rates suggests diversity among companies in measurement date, liability structure, investment philosophy, and willingness to be aggressive when setting rates.”

Plan sponsors with calendar fiscal years will typically need to wait until year-end before they can finalize their discount rates. Plans with a fiscal year-end of November 30 have enough information now to determine the discount rates for the 2010 disclosure. Plans with a calendar fiscal year may want to look at how rates have changed from December 31, 2009, through November 30, 2010, and make assumptions about the range of yield change they expect during December, SEI said.

Data are derived from the 2009 SEI Plan Sponsor Accounting Database, which consists of data from Standard & Poor’s Institutional Market Services database, as well as proprietary analysis created by SEI’s Institutional Group.

As far as return on asset (ROA) assumptions, SEI said plan sponsors may receive some pressure from auditors to review their ROA figures to determine whether current assumptions are reasonable. SEI said that, of the 662 plan sponsors in the database reporting ROA changes, more than half (61%) did not lower their ROA between 2008 and 2009, while 39% decreased it.

“While recent market experience is a consideration in selecting an ROA assumption, plan sponsors should consider what they expect the portfolio to return over the long term. They should look at long-term capital market assumptions as a guide but customize them for their portfolios’ asset allocations,” SEI said.

A copy of the research is available by e-mailing seiresearch@seic.com