US - Pension plan costs at major US companies have failed to drop despite improved investment returns, according to new research by Mercer.
The analysis - How Does Your Retirement Program Stack Up - by Mercer Human Resource Consulting and Mercer Investment Consulting found double digit returns in 2004 for the second year in a row spurred only modest improvement in the funded status of plans and plan liabilities continued to rise.
“As employers seek to manage costs in an increasingly competitive business environment, pension costs will continue to be closely scrutinised,” said Mercer HR consultant and author of the study, Mike Young. “Over time, this scrutiny will result in changes, both in employers’ financial management and design of these programmes and in the role employees play in planning for their retirement needs.”
While liability growth outstripped investment returns, new contributions saw some improvement in the overall financial health of pension plans, Mercer said.
From the beginning of 2003 to the end of 2004, the median plan’s funded status improved from 75% to 81% but during the same two year period, median plan costs remained at 0.5% of corporate revenue. Funded ratios had increased slightly in 2005, up to 83%.
Mercer said the median return on assets was 18.1% for 2003 and 12.2% for 2004 but liabilities increased during the period due to the lower interest rates used to value the liabilities. The discount rate used in the median plan decreased from 6.75% to 5.8% from 2002 to year end fiscal 2004, as long term interest rates fell.
Carryover of old losses due to “smoothing” boosted pension expense by 47%, Mercer added.
“At the median, amortisation of these unrecognised losses increased dramatically, from 0.1% of revenue in 2003 to 0.15% in 2004,” Mercer said. “Looked at another way, recognition of past losses added, at the median, a whopping 47% to what the expense would have been without the loss amortisaton. A significant portion of these past losses stems from the adverse experience during the market downturn of 2000 - 2002.
Mercer analysed retirement plan data disclosed by companies in the S&P 500 in their 2004 10-K reports. About 70% operate defined benefit plans.
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