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CCH® PENSION AND BENEFITS — 12/13/06

New pension laws, accounting rules prompt change in plan investment strategies

As a result of recent changes in pension laws and accounting rules, American companies are joining a global trend to more closely match pension investments with long-term plan liabilities, instead of focusing solely on the amount of assets in the plan, according to Watson Wyatt Investment Consulting.

The Pension Protection Act of 2006 (P.L. 109280) and recent changes in pension accounting rules have resulted in higher funding targets, restrictions on smoothing, and requirements to value pension assets and liabilities at market value. These changes are prompting companies to seek more predictable returns through liability-driven investing, according to Mark Ruloff, director of asset allocation at Watson Wyatt.

In order to achieve funding status predictability in this new environment, Watson Wyatt has been recommending an asset allocation methodology which includes decreasing public equity investment in favor of fixed income and alternatives. They are also recommending "enhancing alpha opportunities (performance that exceeds benchmarks)." Watson Wyatt states that during the past year, it has been recommending the use of such liability-driven strategies in more than 90 percent of its asset allocation work for U.S. companies, in the belief that this will provide plan sponsors with enhanced protection and performance over the long-term.

For more information on this and related topics, consult the CCH Pension Plan Guide.

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