News & Information

 

FEATURED PRODUCT

U.S. Master Pension Guide, 2012 Edition
Part of CCH's Master Series of professional guidebooks. The book provides a comprehensive explanatory overview of qualified retirement plans and other retirement arrangements, reflecting up-to-date law changes and regulations. Benefit COLAs, calendars, and tables reflect the year 2012 figures.

Learn More »

CCH® PENSION — 8/27/07

FAS No. 158 Impact Not As Great On Shareholder Equity; Median Funded Status Improves To 89% For 2006

From Spencer's Benefits Reports: The impact of Financial Account Statement (FAS) No. 158 on shareholder equity of publicly-traded companies has not been as negative as expected, according to research conducted by Mercer Human Resource Consulting and Mercer Investment Consulting. The actual median after-tax reduction in shareholder equity was only 1.7% for the 304 Standard & Poor’s 500 companies that reported adopting FAS No. 158 in 2006. Mercer had predicted that shareholder equity would have been reduced by 2.8% in 2005 and 3.2% in 2004 if FAS No. 158 had been in effect in those years.

The after-tax charge to shareholder equity was necessary to adjust for the difference between the new and old accounting standards imposed by the Financial Accounting Standards Board. Most companies with noncalendar fiscal years will make the adjustment in 2007. Mercer attributes the lower-than-expected reduction to 2006 asset returns that exceeded liability growth. Reductions in equity ranged from 0.4% to 5.2% for those companies in the 25th to 75th percentiles.

The median actual return on assets in 2006 was 13.4%, with most companies exceeding the 8.2% median expected return. Even companies in the 10th percentile had a median return on assets of 8.8%. At the same time, the actual median rate of return on liabilities during 2006 was 6.0%, versus an 11.1% median return on liabilities in 2005. Mercer noted that the actual median rate of return on liabilities would have been less (4.2%) if experience losses from currency conversion of non-U.S. plans were not taken into account.

Consequently, the median funded status for 367 S&P 500 plan sponsors grew from 83% in 2005 to 89% in 2006. The median funded status ranged from 70% for companies in the 10th percentile to 112% for companies in the 90th percentile. Mercer found that the 367 companies reported total pension plan assets of $1.45 trillion, versus total pension obligations of $1.50 trillion.

Asset Allocation Changes

Actual asset allocation of the defined benefit plans studied has changed very little in the past three years:

Mercer notes that fixed income may become a larger component of pension plan assets once the impact of the Pension Protection Act of 2006 (PPA) and mark-to-market accounting rules begin to have an effect. Outside of the United States, where mark-to-market accounting and funding rules have been in effect for some time, plan sponsors have reduced their equity exposure and lengthened their fixed income portfolio durations.

The new funding rules under the PPA require defined benefit plan sponsors to fund each year’s benefits as they are earned and to fund any unfunded accrued benefits over a seven-year period rather than a much longer period. Additional funding rules under the PPA will cause more rapid funding by plans that are “at risk” because their funding target attainment percentage is less than 80%.

Mercer concludes, “Once their legacy costs are fully funded under PPA, plan sponsors will have the opportunity to focus on investment and design policies that maintain funded status and mitigate risk.” In addition, “PPA offers some interesting new opportunities for pension plan design, such as leveling the playing field between 401(k) and cash balance plans and enabling automatic savings features in defined contribution plans.”

For an executive summary of the Mercer report, entitled How Does Your Retirement Plan Stack Up?, visit http://www.mercerhr.com/knowledgecenter/reportsummary.jhtml/dynamic/idContent/1274575. The full report will be available this fall.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.

Visit our News Library to read more news stories.