Falling discount rates since 2007 have had a major negative impact on pension plans at some of the largest companies in the United States.
A study by PricewaterhouseCoopers found that the median discount rate decreased 75 basis points from 2011 to 2012 and 225 basis points since 2007. That may not seem like much, but according to Pwc, a typical plan with a benefit obligation of $1 billion would increase its plan liability by $120 million because of the 75-basis-point decrease in the discount rate. The 225-basis-point drop from 2007 would increase plan liabilities by about $390 million.
PricewaterhouseCoopers conducted a study of pension and other post-employment benefits at 100 large and established companies to see just how far the discount rate and rate of return has dropped since 2007.
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It also found that the median expected long-term rate of return on pension plan assets decreased 25 basis points since 2011 and 55 basis points since 2007.
"While equity market declines were significant during this period, the relatively small decrease in this assumption generally reflects the long-term nature of the expected return assumption, which is meant to estimate asset returns over the period benefits will be paid," according to the analysis.
For a plan with $1 billion in assets, a decline of 25 basis points would result in $2.5 million in additional pension expenses annually. A decline of 55 basis points to the expected return on assets assumption would result in a $5.5 million increase in annual pension expense, the report found.
The median salary scale assumption decreased 25 basis points to 4 percent from 2007 to 2012, which is consistent with the decrease in other economic assumptions over the period.
The funded ratio of pension plans also took a major plunge from 2007 to 2012. The median and mean ratio of pension funding decreased from 100 percent and 102 percent respectively to 77 percent and 76 percent in 2012. In 2007, more than 40 companies had pension plans that were 100 percent funded. In 2012, only two plans could make that claim.
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