A Mercer news release said the latest data reflects the now well-documented shifting defined benefit to defined contribution benefits landscape, with the median defined contribution plan costing 0.39%of revenue in 2008, compared to the median value of median defined benefit accruals of 0.38%of revenue. Although DC spending was relatively constant from 2005 through 2008, DB spending was down from 0.51 %of revenue in 2005, Mercer reported.
“For the first time we are seeing that companies are spending more on their 401(k) and other DC plans than they are on providing their employees with pension benefits for the current year of service, reflecting years of DB plan freezes, closures or other cutbacks.” said Steve Alpert, a principal and consulting actuary with Mercer and primary author of the study, in the news release.
Alpert continued: “In the new landscape, employees will have to shoulder both a greater share of the burden for their own retirement and more of the associated risks. As employees begin to understand this new dynamic, employers that recognize and address these emerging employee needs may have a competitive advantage in the labor market.”
Pension Plans’ Health
In terms of the S&P companies during 2008, Mercer said the financial health of pension plans worsened markedly and reversed all the gains earned this decade, with aggregate pension assets falling $310 billion short of pension liabilities. Mercer said aggregate pension plan liabilities of $1.45 trillion bested aggregate pension assets of $1.14 trillion in 2008, wiping out a $60-billion excess of assets over liabilities at the end of 2007, and years of funding gains since 2002.
The funded status of pension plans sponsored by companies in the S&P 500 declined due to negative asset returns, with no corresponding increase in the discount rates used to value the actuarial pension liabilities, the data showed.
Median plan assets declined by more than 25%, while discount rate increases, which decrease the value of liabilities, were only 5 to 15 basis points. This combination drove the median funded status for individual pension plan sponsors in the S&P 500 to 72% at fiscal year-end 2008, down from 94%at the end of 2007.
class=”NormalIndent1″> Mercer’s study places 13% of the S&P 500 companies’ pension plans in the “most serious” risk exposure category – companies with the most material plans (obligations greater than 40% of market capitalization) and benefit obligations that are the least funded (less than 75%). An additional 48% of companies are between 75% and 100% funded or have pension obligations that are between 10% and 40% of market capitalization, Mercer said.
class="NormalIndent1"> The average target asset allocation for pension assets includes 58% in equities, a five-percentage-point decrease during the past four years, according to Mercer's annual study of S&P 500 companies' retirement programs. Sponsors that invested less than half of their plan assets in equities were rewarded with actual asset returns during 2008 that, although still negative, were approximately 10% to 20% better than the returns generated by the sponsors with more than half of the plans' assets invested in equities, according to a Mercer news release.
In addition to the risks posed by equity investing, 2008 revealed a previously little-considered risk of changing credit spreads - the difference between the discount rates used to value pension obligations and the yields on Treasury bonds that are included in the fixed income portion of many pension portfolios, Mercer said.
In 2008, Treasury bond assets increased in value relative to pension liabilities. As noted in the Mercer study, if credit spreads return to their historical norms, an investment in Treasuries will likely significantly underperform both liabilities and corporate bonds.
Mercer based its analysis primarily on information contained in the 10-K reports filed by the companies in the S&P 500 for the 2008 fiscal year. Among these companies, 376 reported information on DB pension plan liabilities. The survey also collected data on DC and retiree medical and life insurance plans.
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