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CCH® PENSION AND BENEFITS — 06/25/09

Median Cost For Defined Contribution Plans Now Exceeds Cost For Defined Benefit Plans

from Spencer’s Benefits Reports: In 2008, the median cost as a percentage of revenue for defined contribution plans sponsored by the Standard & Poor’s 500 companies has exceeded the median cost for defined benefit plans (.39% versus .38%), for the first time. The median cost for defined contribution plans has remained steady over the last four years (.37% in 2005-2007) while the median cost for defined benefit plans has declined from .51% in 2005, .46% in 2006, and .42% in 2007. According to Mercer, the reason for the decline in defined benefit costs is a reflection of freezing of accruals, closure of plans to new participants, or other cutbacks.

Over the same four year period, the percentage allocation of employer contributions to retirement plans has remained almost unchanged, as follows:

Mercer reported these and other figures in its annual survey of retirement programs sponsored by S&P 500 companies entitled How Does Your Retirement Program Stack Up?—2009. The survey data came primarily from information reported in 10-K filings for fiscal year ends that occurred between February 2008 and January 2009. (The report uses the term “fiscal year 2008” to refer to all of this data.)

The median funded status of the 376 companies that sponsored defined benefit plans in the study was 72% at the end of fiscal year 2008, a decline from 94% at the end of 2007, 89% at the end of 2006, and 83% at the end of 2005. Mercer noted that this represents the market value of plan assets and the Projected Benefit Obligation (PBO), which is reported on corporate balance sheets. The financial industry had the highest median funded status in 2008 (79%), followed by consumer staples (75%), industrials (74%), telecommunication services (74%), and information technology (73%). The utility industry had the lowest median funded status for 2008 (67%).

Negative actual return on assets in 2008 was a major factor for the decline in funded status. According to Mercer, “From 2003 through 2007, median returns for the S&P 500 pension plans averaged 12.3% per year, with median returns in any one year never less than 8%. In 2008, our median plan saw those cumulative excess returns wiped out, with a one-year loss of 25.6%.” The median expected return assumption remained at 8.25% for 2006 through 2008.

The actual asset allocation for defined benefit plans in 2008 was 52% equity, 38% fixed income, 2% real estate, and 8% “other.” This represents a significant change from 2007 when the asset allocation was 61% equity, 32% fixed income, 2% real estate, and 6% “other.” Mercer noted that the change in “other” reflects an expansion into alternative assets, such as private equity, commodities, infrastructure, and hedge funds. In prior years, the actual asset allocation was almost the same as the target allocation that plan sponsors had specified for themselves. However, in 2008, the actual equity allocation (52%) lagged behind the target allocation (58%) while the actual fixed income allocation (38%) was ahead of the target allocation (34%).

Mercer found that 376 companies in the S&P 500 sponsored defined benefit plans in 2008, 468 companies sponsored defined contribution plans, and 329 companies sponsored post-retirement medical plans. There were 354 companies with both a defined benefit and defined contribution plan, and there were 307 companies with a defined benefit, defined contribution, and post-retirement medical plan. Only 22 of the companies with a defined benefit plan did not sponsor a defined contribution plan, while 114 companies sponsored a defined contribution plan but no defined benefit plan.

For a copy of the 40-page study, visit http://www.mercer.com/retirementbenchmarking.

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