Mercer: DB Plan Funding Shows Turnaround in 2006

June 15, 2006 (PLANSPONSOR.com) - A new report from Mercer Human Resource Consulting and Mercer Investment Consulting finds that the rise in interest rates in the first five months of 2006 could have a significant positive impact on the funded status of defined benefit pension plans.

According to a Mercer news release, its analysis of 10-K reports from 488 companies in the S&P 500 shows that the funding status of DB plans at major US companies remained steady at 83% in 2005. Investment returns for these plans dropped in 2005 to a median 8.2%, compared to 12.4% and 18.1% in 2004 and 2003, respectively, and were off to a weak start in 2006.

Despite the slowing of returns, the discount rate on sample plans it analyzed rose 75 basis points. Combined with the 2006 investment returns, the effect would be an increase in the funded status of the median plan analyzed from 83% to 93%, the release said.

The study also looked at the effect the new proposed accounting rules from the Financial Accounting Standards Board (FASB) will have on companies’ financial reports. The rules would require companies to reflect the funded status of pensions and other post-employment benefits on their balance sheets (See FASB Issues Proposed Accounting Changes for Pensions and OPEB ).

The Mercer analysis found that if the accounting change had been in effect during the 2004 and 2005 fiscal years, many S&P 500 companies would have experienced a reduction in shareholder equity of nearly 3%, assuming a 35% tax rate. For many companies the effect would have been greater, with one-fourth of plans experiencing a reduction in company shareholder equity of 8% or more. One-tenth would have seen shareholder equity reduced 18% or more, and handful would have had shareholder equity wiped out as a result of the accounting change, the release said.

Mercer notes that, despite a recent rash of companies freezing their defined benefit plans, most of the S&P 500 sponsors have not taken that route. While Mercer expects more companies to freeze their DB plans, it believes that action will be the exception and not the rule.

The report “How does your retirement program stack up?” will be available this summer.

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