The 2005 Survey of Actuarial Assumptions and Funding is Watson Wyatt's 37th 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 as well as the changes in funded status.

Three hundred and eighty-one companies participated in the 2005 survey, reporting on 412 pension plans. Watson Wyatt has been appointed actuary for 291 of the plans. The data are based on plan valuations: 13 percent of the valuations are for the 2003 plan year, 49 percent are for the 2004 plan year, and 38 percent are for the 2005 plan year.

Twenty-one percent of all plans surveyed for 2005 have a "hybrid" plan design where the formula benefit is expressed as a lump sum. 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 (PEP) type plans that accrue benefits based on final average pay. Traditional defined benefit pension plans express accrued benefits in an annuity form.

The primary benefit formula for 54 percent of the plans is a traditional final average pay formula, and for 5 percent of the plans the primary benefit formula is a PEP 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 16 percent of the plans the primary benefit formula is a cash balance formula. For the remaining 14 percent of the plans the primary benefit formula is unrelated to pay.

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' 2004 fiscal year is presented in Watson Wyatt's report Accounting for Pensions and Other Postretirement Benefits, 2005.

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.

Funded Status (Schedule B Current Liability)

• 43 percent of all plans in the survey have assets at market value greater than the total current liability for accrued benefits. 52 percent of hybrid plans in the survey have assets exceeding total current liability. Last year the comparable values were 33 percent for all plans and 38 percent for hybrid plans. Five years ago the comparable values were 82 percent for all plans and 84 percent for hybrid plans. The decline through 2004 would have been even greater if not for the Job Creation and Worker Assistance Act of 2002 (JCWAA), which increased the maximum interest rate used to determine current liability for 2002 and 2003 plan years, and the Pension Funding Equity Act of 2004 (PFEA), which permitted the use of the long-term investment grade bond rate for 2004 and 2005 plan years.
• During the period from January 1, 2003, to January 1, 2005, the IRS interest rate for determining current liability ranged from 4.74 percent to 6.65 percent. Prior to PFEA, the maximum interest rate for determining current liability for a 2005 calendar year plan was 5.35 percent. After PFEA, the maximum was increased to 6.10 percent. Most companies in the survey used the maximum permissible rate as of their most recent calculation date.
• For plans valued as of January 1, 2004, 70 percent used the maximum permissible current liability interest rate of 6.55 percent, and 19 percent used the minimum rate of 5.89 percent.
• For plans valued as of January 1, 2005, 92 percent used the maximum permissible current liability interest rate of 6.10 percent, and 5 percent used the minimum rate of 5.49 percent.
• The average current liability interest rate for all plan types is 6.2 percent, unchanged from the 2004 survey.

Actuarial Cost Methods for Cash Funding

• 65 percent of the plans use the projected unit credit cost method.
• 20 percent use the entry age cost method.
• 9 percent use the traditional unit credit cost method.
• 2 percent use the frozen entry age cost method.
• 4 percent use the aggregate cost method.

Interest Rate Assumptions for Determination of Cash Funding

• Interest rates range from 5.0 percent to 10.0 percent.
• The average interest rate is 8.1 percent for all plans, unchanged from the 2004 survey.
• Interest rates show little variation by type of primary benefit formula. Traditional pay-related and hybrid plans have an average rate of 8.1 percent. The average rates are 8.1 percent for final average pay plans, 8.0 percent for career average pay plans, 8.1 percent for single-employer plans with benefits unrelated to pay and 7.7 percent for multiemployer plans with benefits unrelated to pay.

Salary Increase Assumptions

• Salary increase assumptions range from 1.7 percent to 9.5 percent for plans that base benefits on pay.
• The average salary increase assumption for all payrelated plans is 4.6 percent, a decrease from 4.8 percent in the 2004 survey. Salary increase assumptions show little variation by type of primary benefit formula. For traditional pay-related and hybrid plans the average salary increase assumption is 4.6 percent. For final average pay plans the average salary increase assumption is 4.8 percent, unchanged from 2004.

The "Spread" (Cash Funding Interest Rate Minus Salary Increase Assumption)

• The average spread for final average pay plans is 3.3 percent, unchanged from the 2004 survey. For hybrid plans the average spread is 3.5 percent.

Actuarial Value of Assets

• 16 percent of the plans use the market value of assets as the actuarial value.
• 84 percent use other bases to determine the actuarial value, primarily either a moving average of market value or an adjusted market value approach.
• For the 2005 survey, the actuarial value of assets for all plans that do not use market value as the actuarial value of assets is 4.0 percent higher than market value on average. For the 2004 survey, on average, the actuarial value of assets for all plans that did not use market value as the actuarial value was 9.5 percent higher than market value.

Cash Funding

• 25 percent of the plans have contributions restricted by the full funding limit. This is a decrease from 31 percent of plans last year. Until 2001, the number of plans with restricted contributions had increased every year since 1995, primarily due to the strong investment performance.

Funding Target Ratio

• The Funding Target Ratio is a relative measure of funding conservatism. This ratio compares a plan's actuarial accrued liability with its current liability. Higher ratios generally indicate more conservative assumptions and methods.
• 42 percent of the plans had Funding Target Ratios of 100 percent or greater. This is an increase from 30 percent for last year.

	TABLE OF CONTENTS Executive Summary Accrued Benefit Security Ratios by Valuation Year 10-Year Trends Form 5500 Schedule B Filings vs. Survey of Actuarial Assumptions and Funding Results Funded Status Based on Schedule B Current Liability Actuarial Bases - Current Uses and Trends Description of 2005 Survey Plans