Companies that operate traditional pension plans felt the pinchlast year when low interest rates combined with mediocre equityreturns to erode plan funding. That pinch is likely to continuethis year. SEI, an asset management and investment processingcompany, predicts plan sponsors will lower the discount rate theyuse to measure their future liabilities, a move that means manywill end up needing to contribute more to their plans.

A recent study by SEI suggests that in the coming year, plansponsors will use discount rates that are 70 to 85 basis pointslower than last year's. The discount rate is used to measure adefined-benefit pension plan's future liabilities.

Jon Waite, director of investment management advice and chiefactuary of the institutional group at Oaks, Pa.-based SEI, says thechange in plan sponsors' discount rates reflects the change in bondyields in the past year. “We saw yield curves overall drop about 50basis points, and what we're seeing is that's following through onthe various rates they're selecting.”

Pension plan discount rates were “significantly low” even beforethe latest decrease, Waite says. “As discount rates in general comedown, we're going to see contribution requirements increase,” headds.

The discount rate for pension plans is typically tied to theyield on AA-rated corporate bonds. But SEI suggests that companiescome up with a discount rate by calculating their pension plan'sfuture obligations and looking at the yields at matching points onthe yield curve, rather than just adopting a single rate from abond index. That method could mean more variance in the discountrates used by various plan sponsors, Waite says.

In fact, though, the range of discount rates is narrowing. TheSEI study shows that in 2010, discount rates ranged from 4.80% to6.20%, a 140-basis-point range that was 21 basis points narrowerthan the range in 2009.

The SEI study also shows that relatively few plan sponsorsadjusted their assumption about the return on their plan assets,despite the market volatility in recent years. In 2010, 45% of plansponsors left their return on assets assumptions unchanged, while17% increased their assumptions and 38% decreased theirassumption.

The majority (59%) of the 686 plan sponsors studied hadreturn-on-asset assumptions between 7.50% and 8.50%, and 90% hadreturn-on-asset assumptions between 5.36% and 8.66%.

Mercer, the human resources consulting company, estimatesthat the aggregate funded ratio of the pension plans ofS&P 1500 companies declined to 75% at the end of 2011 from 81%at the end of 2010. Mercer calculates that S&P 1500 companieswith traditional pension plans have an aggregate plan deficit of$484 billion as of yearend 2011, up $169 billion from yearend 2011,even though companies made an estimated $50 billion incontributions to their plans last year.

For more on the outlook on pension funding, seePlan Sponsors Face a Decade of Rising Contributions.