One-fourth of DB Plan Sponsors Lack Funding Policy

September 22, 2008 ( - Despite the Pension Protection Act's (PPA) requirement that defined benefit plan sponsors provide annual funding notices with a description of the plan's funding policy, 27% of DB sponsors fail to develop and then adhere to a formal funding policy, Mercer found.

An analysis of the funding policies of more than 250 defined benefit plans found nearly one fourth (23%) have implemented an explicit funding policy, and another 49% have an implicit funding policy, according to a Mercer news release.

Fifty-one percent of sponsors surveyed fund only the minimum amount required by law, either by default or intentionally. Twenty-four percent of those with a funding policy fund the minimum, while 27% are contributing the minimum as required by law without benefit of an articulated policy.

One-quarter of DB sponsors fund some other amount such as the fiscal year pension cost, an amount to cover accrued accounting liabilities (ABO), or an amount to cover the projected accounting liabilities (PBO) to extinguish any balance sheet unfunded obligation, Mercer said.

The survey also found:

  • 82% of plan sponsors value liabilities using the PPA “segmented” yield curve as the interest rate, as opposed to a full yield curve. The segmented yield curve results in expected lower year-over-year volatility in required contributions and greater predictability of discount rates, which facilitates more accurate budgeting. Mercer expects plans that strategically invest their assets to closely resemble their plan liabilities (liability driven investing) will want to use the full yield curve, and that more plan sponsors will use the full yield curve in the future.
  • 21% of plan sponsors surveyed said they intend to terminate their defined benefit plans if economic conditions are right. Among these, just one third have developed an exit strategy resulting in a formal termination of the plan.

Mercer will present a Web briefing “Do you have a pension funding policy…and is it working?” free of charge on Wednesday, September 24, at 3 p.m. eastern time. See .