August 1998 Issue


Buck Consultants, Inc. has released its annual Economic Pension Funding Assumptions Survey, which examines interest rates and other assumptions that companies use for funding or contributing to their defined benefit pension plans.

Assumptions used for funding are frequently different than those used for determining pension expense for accounting purposes. The study revealed that the average funding interest rates increased for the 1996 plan year, while the salary increase rates declined.

The Buck study examined defined benefit plans of 246 employers in a cross-section of industry. All of the surveyed employers are Buck clients, including many Fortune 1000 companies. Specific findings include the following:

    * Funding Interest Rate. The average funding interest rate used in 1996 was 8.19% versus 8.10% in 1995. Transportation companies used an average funding interest rate of 8.33% in 1996, the highest average used among the seven specific industry groups reported in the study. Utility companies used the lowest average rate (7.82%). A higher interest rate typically results in a lower contribution requirement.

    * Equivalent Salary Increase Rate. The average salary increase rate used in 1996 was 5.37% compared with 5.47% in 1995. Diversified service employers used the highest average rate (5.80%); hospitals used the lowest average rate (5.06%).

    * Actuarial Cost Methods. Seventy percent of all employers used the accrued benefit (unit credit) method for determining contributions for the 1996 plan year. Seventeen percent used the frozen initial liability method. *

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