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DB Plan Sponsors Using Different Strategies for Cost, Funding Measures

PwC finds some DB plan sponsors are using multiple discount rates, and some have moved to mark-to-market accounting.

By Rebecca Moore editors@strategic-i.com | August 01, 2017
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For defined benefit (DB) plans included in a PwC study, the 2016 median discount rate decreased 20 basis points since 2015 (from 4.30% to 4.10%) and has decreased more than two full percentage points since 2007 (from 6.25%), reflecting the low interest rate environment of the past decade.

PwC’s Pension/OPEB 2017 Assumption and Disclosure Study, which represents an analysis of the 2016 year-end assumptions and disclosures of DB plans and analyzed data for 100 companies, comprising Fortune 100 and other large and established companies with a December 31 fiscal year-end, also found the 2016 median expected long-term rate of return on pension plan assets decreased 25 basis points since 2015 (from 7.25% to 7.00%) and 130 basis points since 2007 (from 8.30%), reflecting less optimistic capital markets outlooks of investment professionals.

The 2016 median salary scale assumption decreased 17 basis points since 2015 (from 3.97% to 3.80%) and has decreased 45 basis points since 2007 (from 4.25%).

Median plan funding levels remained unchanged from 2015, with pension plan assets equal to approximately 82% of the projected benefit obligation (PBO) in 2016 and 2015. In 2007, the median funded ratio was 100%. If interest rates were to return to 2007 levels, PwC estimates the median funded ratio would increase to roughly 110%.

Median deferred losses for pension plans in the study remained unchanged at 33% of the projected benefit obligation at the end of both 2015 and 2016. Of the 89 companies that defer recognition of gains/losses, 87 were in a loss position at 12/31/2016.

Median 2016 asset allocations for pension plans in the study were generally consistent with 2015 allocations at 40% equity, 39% debt/fixed income, and 16% other in 2016, compared to 39% equity, 40% debt/fixed income, and 15% other in 2015. In 2007, the median values were 64% equity, 29% debt/fixed income, and 5% other.

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