According to the study, the health of plans sponsored by companies in the S&P 1500 continued to improve from the 2008 lows. As discount rates continued to fall, increasing plan liabilities, median pension funded status saw slight improvement, from 75% to 78% at fiscal year-end 2010.
Aggregate assets of approximately $1.4 trillion were estimated to be $282 billion short of pension liabilities of approximately $1.7 trillion at the most recent fiscal year-end, and $211 billion short as of March 31, 2011. Overall, the report suggests, pension plans may be nearing the end of their “growth” or “accumulation” phase and transitioning to a “spend-down” phase.
“Despite employer contributions of $77 billion and aggregate asset returns of $156 billion (a 12% median rate of return), pension deficits decreased by only $8 billion during the fiscal year,” said Eric Veletzos, a principal and consulting actuary with Mercer and the study’s primary author. “Liability growth of $181 billion, mostly due to falling discount rates, plus new benefit accruals of $31 billion, offset the positive asset performance and contributions.”
Veletzos also noted a decline in the number of underfunded pension plans among the S&P1500 companies, saying, “The percentage of companies with plans that are both poorly funded and large relative to the size of the plan sponsor continued to decline to 5% in 2010 from 9% in 2009 and 13% in 2008.”
The study also investigated pension investment trends, and found that pension assets are still largely invested in higher risk assets with less than 40% allocated to lower risk – including long-maturity fixed income investments that can offset the changes in plan liabilities when discount rates rise or fall.
The study found that projected year-end 2011 funded ratios range from 65% to 107% at the 5th and 95th percentiles, respectively. Most (93%) of companies have underfunded plans, and approximately 30% are expecting their significant allocation to higher risk assets to generate asset returns that will exceed the expected growth in plan liabilities.
“In spite of two 'once in a lifetime' economic events in the past decade, plan sponsors have not materially adjusted their investment policies to reduce the percentage of higher risk assets in their portfolios,” said Veletzos. “This has left plans exposed to potentially significant swings in funded status, expense and contributions should another market downturn occur.”
For the third consecutive year, the study found, the median cost for DC benefits exceeded the median cost for benefits earned in DB plans. In 2010, the median DC plan cost was 0.38% of revenue, as compared to the median value of DB benefit accruals of 0.34% 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.
As the recession unfolded, DC plan participants reduced their contribution rates, and DC account balances underperformed DB plan investments. The report claimed that some of this difference may be attributable to the degree of DC assets invested in capital preservation options – stable value and money market – which are not typically a significant part of DB plan investment strategies.
“Actual performance of DC plan accounts has significantly lagged the performance of DB accounts over the last several years,” said Parsons. “Therefore, as we see employers shift their retirement benefit delivery to DC vehicles, employees must adapt to the increased burden of providing for their own retirement security while bearing additional risks.”
The report provides analysis of the retirement programs for the S&P 1500 companies in five key dimensions:
- Pension health: funded status of plans;
- Materiality: size of pension and post-retirement benefits relative to the company;
- Volatility: the risk management posture with regard to benefits that have already been earned and the assets that have been set aside to cover them;
- Sustainability: how future benefits are delivered, and whether current plans are in the “accumulation” or “spend-down” phase; and
- Assumptions and management decisions: the key factors that drive financial reporting results.
The study, which based its analysis primarily on information contained in the 10-K reports filed by the companies in the S&P 1500 for the 2010 fiscal year, is available here.