Despite strong asset returns and significant contributions, median pension funded status improved only three percentage points to 75% at fiscal year-end 2009, as falling discount rates rapidly increased liabilities. A Mercer news release said the plans’ aggregate assets of approximately $1.3 trillion are an estimated $291 billion short of plan liabilities of approximately $1.6 trillion at the most recent fiscal year end, and $252 billion short as of March 31, 2010.
“Despite employer contributions of $75 billion and aggregate asset returns of $161 billion – a 19% median rate of return – pension deficits decreased by only $14 billion during the fiscal year,” said Steve Alpert, a principal and consulting actuary with Mercer and the study’s primary author, in the news release. “Liability losses of $180 billion, mostly due to falling discount rates, plus new benefit accruals of $30 billion, offset the positive asset performance and contributions.”
Alpert added that large plans tend to be better funded than smaller plans. The median funded ratio for the companies with the 75 largest plans (about 10% of all plans, and 70% of the pension liability) is about 80%, while the median company in the remainder is only about 73% funded.
Mercer found that pension assets are still largely invested in higher-risk assets such as equities or real estate, with less than 40% allocated to fixed income securities – including long-maturity fixed income investments that can offset the changes in plan liabilities when discount rates rise or fall.
Pension Plans Entering Spend-down Phase
Overall, pension plans may be nearing the end of their “growth” or “accumulation” phase and transitioning to a “spend-down” phase, according to Mercer’s annual analysis of the retirement programs of companies in the S&P 1500.
Steve Alpert, a principal and consulting actuary with Mercer and the study’s primary author, noted that in 2009, between one-fifth and one-quarter of plans either had no additional benefit accruals or had benefit payments that were greater than the interest on the obligation. “These factors are markers for increasing plan maturity and suggest that as more plans enter the spend-down phase, we may see a decrease in the growth rate of plan liabilities (eventually turning into decreasing liabilities) and possibly a corresponding change in management focus and policies,” he said in the news release.
Mercer’s data confirms that DC plans continue to play an increasingly important role in the benefits landscape. The study revealed that DB plans are more than twice as prevalent in large capitalization firms as in small capitalization firms, while DC plans are equally prevalent across the board. Also, for the second consecutive year, “companies were spending more on their 401(k) and other DC plans than they were on providing their employees with pension benefits for the current year of service, reflecting years of DB plan freezes, closures or other cutbacks,” said Alpert.
In addition, Mercer’s study showed that for the second consecutive year, the median cost for DC benefits exceeded the median cost for benefits earned in DB plans. In 2009, the median DC plan cost was 0.39% of revenue, as compared to the median value of DB benefit accruals of 0.35% of revenue. DC spending has grown slightly from 0.35% in 2006, compared to DB spending, which was down from 0.42% of revenue in 2006.
Mercer’s report, How Does Your Retirement Program Stack Up? – 2010 presents an in-depth analysis of retirement program data disclosed by the S&P 1500 companies in their 10-K reports for 2009. It is available at http://www.mercer.com/retirementbenchmarking.