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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
Due to discount rate increases and strong investment returns, the funded status of pension plans significantly improved during 2006, according to a recent study conducted by Milliman Consultants. However, 2007 is expected to be a year of reassessment, as plan sponsors respond to the funding provisions of the Pension Protection Act of 2006 (PPA; P.L. 109-280), new accounting standards, and emerging demographic trends. Milliman studied 100 large pension funds sponsored by public companies with significant defined benefit pension assets, holding pension assets of nearly $1.3 trillion.
According to the Milliman study, the aggregate projected benefit obligation (PBO) for the companies surveyed decreased by $102.6 billion during 2006, part of a $164 billion decrease during the last four years, leaving an aggregate pension deficit of $4.3 billion. With 94 of the companies showing an increase in the PBO funded ratio during 2006, the funding status of plans has improved during the past four years, but still remains far below 1999 figures. Thus, although the funds are 99.7% funded in the aggregate, this is well below the 1999 funded ratio of 130.4% for the group.
Under the PPA’s new funding rules, the accumulated benefit obligation (ABO) more closely approximates the funding target than the PBO, the study noted. Measured on the basis of ABO, the funded status of pension plans reported an aggregate surplus of $73.9 billion at the close of 2006, as contrasted with deficits of $18.0 billion for 2005, $34.1 billion for 2004, and $38.7 billion for 2003.
The report indicated that the plans studied had an investment return on pension assets of 12.8% during 2006 and a 13.9% average annual rate of return over the last four years, well over their median expected rate of return of 8.4%. However, when the returns over the past seven years are evaluated, the plans had an average annual investment return of only 5.9%, below the median expected return for that period of 8.9%.
Regarding discount rates, after declining for each of the preceding six years, discount rates finally increased at the end of 2006, to a median of 5.75%, which moderated or reversed the growth of pension liabilities.
Of the 100 companies surveyed, 89 have adopted new accounting rules which require the posting of plan funding status on their balance sheets. The aggregate effect for both pension plans and other post-retirement benefits was a post-tax reduction in shareholder equity of $133.1 billion, an aggregate reduction of 5.7%. In response to the new funding and accounting rules, many companies have begun investigating risk management strategies, including “Liability Driven Investing,” to preserve the funded status and mitigate pension financial risks, but most have not implemented these strategies as of yet.
Milliman noted that the new accounting rules have removed the incentive to “fully fund” the accrued benefit obligation, while the new funding rules will restrict companies’ ability to use Credit Balances to manage cash flow volatility.
After averaging over $48 billion for the three prior years, employer contributions decreased to $35.7 billion for 2006, approximately the same amount as in 2002. Contributions are expected to continue to decrease in 2007 as companies delay contributing to their plans until 2008 when the new funding rules established by the PPA become effective.
In its comments on the Milliman study, the American Benefits Council (ABC) noted that the overall health of pension plans had improved during a time when employer contributions to plans declined by 25%. “These findings validate what the business community said throughout the PPA debate — that long-term obligations like pension plans should not be subjected to short-term thinking, because changes in interest rates and the stock market can dramatically alter a plan’s funding status from year to year,” ABC President James A. Klein stated. He also noted that, while plan financial health had improved, the number of defined benefit plans continues to decline. Klein urged policymakers to think of ways to stem the tide of pension plan terminations, including revisiting provisions of the PPA which may unintentionally hasten this trend.
For more information on this and related topics, consult the CCH Pension Plan Guide.
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