Pension Costs Remain Flat Despite Stronger Returns

June 15, 2005 ( - Even though pension plan investment returns hit double digits in 2004, slight gains in plan funding status have not produced lower pension plan costs, according to new research.

An analysis by Mercer Human Resource Consulting and Mercer Investment Consulting found that median plan costs remained at 0.5% of corporate revenue during 2003 and 2004, according to a Mercer news release. During this same period, the median plan’s funded status improved somewhat, from 75% to 81%.

Looking forward, funded ratios as of the beginning of 2005 had improved slightly, to 83%, according to the Mercer announcement.

Mercer researchers found that the median investment return on plan assets was 18.1% for 2003 and 12.2% for 2004. Plan liabilities also increased during 2003 and 2004, primarily because of lower interest rates used to value those liabilities. The discount rate used in the median plan retreated from 6.75% to 6.23% to 5.80% between the end of the 2002, 2003, and 2004 fiscal years, respectively, as long-term interest rates fell, Mercer said. The median expected return for 2004 remained 8.5%.

Finally, pension expense continues to be artificially boosted by the incorporation of past unrecognized losses into the pension expense calculation, Mercer said. At the median, amortization of these unrecognized losses increased dramatically, from 0.10% of revenue in 2003 to 0.15% in 2004, according to the announcement.

Mercer based its analysis primarily on information contained in the 10-K reports filed by companies in the S&P 500 for the 2004 fiscal year. An executive summary of the report, “How Does Your Retirement Program Stack Up?” is here . A free registration is required.