SEI Estimates 2007 DB Discount Rate

December 19, 2007 ( - Defined benefit plan sponsors with a December 31 measurement date should consider increasing the 2007 discount rate used for their pension calculations by 25 to 50 basis points.

That was a central recommendation offered by SEI in its annual assessment of the effects of   Financial Accounting Standards No. 87 (FAS 87) regarding the disclosure of discount rates and expected return on asset assumptions.The caveat to this analysis, warned author Jon Waite, Chief Actuary for SEI’s Global Institutional Solutions Team, is that the range of movement of the indexes throughout 2007 means the range of selected discount rates could still see significant variation from that estimate.

At the end of each fiscal year, plan sponsors are required to select a discount rate to be used in valuing their plan’s accounting liabilities that must be based on current market conditions and disclosed in the footnotes to the financial statements. The discount rate selected for the 2007 disclosure is the same rate that will be used in the calculation of 2008 pension expense.

“The changes in spreads and in the shape of applicable yield curves require a close examination of the data and a clear process for selection of these assumptions,” said Waite, in a news release. “When combined with all of the other changes in pension rules, plan sponsors are in need of transparent and understandable guidance on these and other pension financial management issues.”

According to the SEI report, 90% of companies with DB plans in the 2007 SEI Plan Sponsor Accounting Database (more than 900 sponsors reporting) set their discount rates in their 2006 pension disclosure between 5.12% and 6.15%.

Waite said the 103-basis point range of discount rates suggested diversity among companies in measurement date, fiscal year, country of origin of the pension plan, liability structure, investment philosophy, and willingness to be aggressive when setting rates.A more reasonable range of rates from the 2006 disclosure was between 5.75% and 6%, which was used by half of the companies in the database, Waite said.

Of the 951 plan sponsors reporting 2006 ROA assumptions, half of them had ROAs between 7.99% and 8.50%, the same range relative to the analysis of 2005. Some 90% of the plan sponsors had ROAs between 6.35% and 9%.

In terms of the number of sponsors changing their ROA assumptions, Waite said 28% of the companies in the SEI database lowered their ROA assumption, indicating that return assumptions for prior years were still considered to have been appropriate. The vast majority of companies (64%) did not change their ROA assumption.

The latest FAS 87 research report is here .