U.S. pension plans returned an average 13.39% on their assets in 2006, outperforming the 3% return on their liabilities, according to a Merrill Lynch report released today. The aggregate funded ratio for the 343 S&P 500 companies that sponsor defined benefit plans will be about 100% by the end of this year, predicts the report by research analysts Gordon J. Latter, John Haugh and Phil Galdi.
The improved funding and the need to manage a new corporate balance sheet risk under the new Financial Accounting Standards Board's Statement 158 accounting rule might create an ideal opportunity to adopt a liability-driven investment strategy, the report stated. But "many pension plan sponsors believe that it is too expensive to implement an LDI strategy in the currently low interest-rate environment," the authors wrote.
Few U.S. plan sponsors have adopted LDI, even though FAS 158, which moves pension funding levels to the balance sheet from footnotes, bolsters use of such a strategy, the report stated.
"Arguably, there is equal likelihood that rates could rise or fall from current levels," the report stated. "A typical plan's funded status will improve if rates increase from current levels. However, if rates decrease by a like amount, the plan would lose at least as much. This is a rather large gamble for a fiduciary to take."