2002 Survey of Actuarial Assumptions and Funding: Pension Plans with 1,000 or More Active Participants

Executive Summary

The 2002 Survey of Actuarial Assumptions and Funding is Watson Wyatt’s 34th annual survey of pension plans in the United States covering 1,000 or more active participants. The survey provides information on the funded status of pension plans, the actuarial assumptions used to determine their funded status and the actuarial bases used to determine cash funding amounts. The survey presents data to illustrate trends in the choice of actuarial assumptions and methods and the changes in funded status.

Financial Accounting Standards Board Statement Number 87 (FAS 87) established standards of financial accounting and reporting for employers that offer pension benefits to their employees. Plan information related to FAS 87 is not discussed in this report. FAS 87 information for companies’ 2001 fiscal year is presented in Watson Wyatt’s report Accounting for Pensions and Other Postretirement Benefits, 2002.

Four hundred nineteen companies participated in the 2002 survey, reporting on 472 pension plans. Watson Wyatt has been appointed actuary for 384 of the plans. The survey data are based on plan valuations: 6 percent of the valuations are for the 2000 plan year, 57 percent are for the 2001 plan year, and 37 percent are for the 2002 plan year.

Nineteen percent of all plans surveyed for 2002 have a “hybrid” plan design where the formula benefit is expressed as a lump sum. Traditional defined benefit pension plans express accrued benefits in an annuity form. The hybrid plans come in two forms: cash balance plans that accrue benefits based on career average pay or a flat-dollar amount and pension equity/cash value plans that accrue benefits based on final average pay.

The primary benefit formula for 55 percent of the plans is a traditional final average pay formula and for 8 percent of the plans, the primary benefit formula is a PEP/Cash Value formula based on final average pay. For 11 percent of the plans, the primary benefit formula is a traditional career average pay formula, and for 11 percent of the plans the primary benefit formula is a cash balance formula based on career average pay. For the remaining 15 percent of the plans the primary benefit formula is unrelated to pay.

The survey was produced by Watson Wyatt’s Research and Information Center. If you have questions about the survey or are interested in a more detailed, specialized analysis, please contact your local Watson Wyatt office.

Report Highlights: Accrued Benefit Security Ratios by Valuation Year

The Survey has historically shown Accrued Benefit Security Ratios sorted by survey year. Because each year’s survey results are based on valuations from the current year and the preceding two years, showing results by survey year can mask trends in plan funded status from year to year.

These two charts attempt to provide a more accurate assessment of funded status trends over the past five years. Instead of sorting the plans by survey year, these charts show Accrued Benefit Security Ratios based on data grouped by year of valuation for the 1998 valuation year through the 2002 valuation year. Note that data is available on only 171 plans for the 2002 valuation year. There are 447 plans included in the 1998 results and over 300 plans in the results for each of the other valuation years. In future surveys, the results for the new survey year will be added and the results for the two preceding years are expected to change as we incorporate the new data received for those valuation years.

Report Highlights: Actuarial Assumptions Surveys 1992–2002

10-Year Trends

The following table shows the movement of the accrued benefit security ratio and some of the key economic assumptions and actuarial methods among survey participants for the 10-year period from 1992 to 2002.

	Survey Year 1992 1997 2002 Accrued Benefit Security Ratio Assets Equal or Exceed Liabilities All plans Final pay plans Unrelated-to-pay plans 85% 94 66 81% 88 60 48% 55 29 Full Funding Limit Applicable Mean Interest Rate All plans Final pay plans 56% 8.3% 8.4 43% 8.2% 8.2 47% 8.1% 8.1 Mean Salary Increases Final pay plans 5.8% 5.2% 5.1% Mean Spread Final pay plans 2.6% 3.0% 3.0% Actuarial Cost Method Final pay plans Entry age normal Projected unit credit Other 28% 60 12 25% 67 8 25% 69 6 Funding Policy All plans ERISA minimum ERISA intermediate ERISA maximum Other 57% 23 14 6 43% 22 14 21 30% 27 11 32 Ratio of Actuarial Value of Assets to Market Value 0.96 0.94 1.04 Mortality Basis 1971 GAM UP-1984 1983 GAM UP-1994 Other 22% 30 29 -- 19 10% 13 64 4 9 4% 5 76 6 9

Report Highlights: Funded Status Based on Schedule B Current Liability

The funded status of a pension plan is one measure of the security of pension benefits earned to date by plan participants. Funded status is defined for purposes of this survey as the ratio of the market value of plan assets to the current liability for accrued benefits. Current liability is the actuarial present value of accrued benefits earned to date under the plan using assumptions specified by the Internal Revenue Service.

The value of accrued benefits is disclosed in the plan’s Form 5500 Schedule B. The interest rate used to compute this value is the current liability interest rate. Generally, a plan must use an interest rate that is between 90 percent and 105 percent of the weighted average of the 30-year Treasury bond interest rate over the 48-month period prior to the start of the plan year. For 2002, the rate can be as much as 120 percent of the weighted average of this Treasury rate due to JCWAA. Most plans in the survey use the maximum permissible rate for the appropriate period.

48 percent of the 2002 survey plans have assets in excess of all accrued benefits. 50 percent of hybrid plans in the survey have assets exceeding total current liability.

• The median Accrued Benefit Security Ratio is 99 percent.
• The median Accrued Benefit Security Ratio for hybrid plans is 100 percent.
• The median Accrued Benefit Security Ratio for multiemployer plans with benefits unrelated to pay is 75 percent.

Report Highlights: Description of 2002 Survey Plans

Types of Plans (Primary Benefit Formula)

The types of primary benefit formulas used by 2002 survey plans are as follows:

• 63 percent of the plans base benefits on final average pay.
• 22 percent of the plans are career average pay plans.
• 15 percent of the plans have benefits unrelated to pay.

Nineteen percent of all plans surveyed for 2002 have a “hybrid” plan design where the accrued benefit is expressed in a lump sum form. The hybrid plans come in two forms: cash balance plans that accrue benefits based on career average pay or a flat-dollar amount and pension equity/cash value plans that accrue benefits based on final average pay. Traditional defined benefit pension plans express accrued benefits in an annuity form. The movement from traditional to hybrid plans is more prevalent among larger employers. The distribution of hybrid and traditional plans in the 2002 survey is as follows:

	Plan Type Hybrid Traditional Final average pay 8% 55% Career average pay 11 11 Unrelated-to-pay 1 14

The figure below shows the distribution of survey plans by number of active participants.