INSIDER

Will the "CLASS" Program Succeed? Is It Sustainable?
Both the House and Senate health care reform bills currently being debated would establish a new voluntary long-term care insurance program. Called CLASS, the new program would be offered to all workers through the Department of Health and Human Services (DHHS). CLASS is significant for at least three reasons. [December 2009]

Hybrid Plans in 2010 and Beyond
A new study by Watson Wyatt highlights the wide-ranging variations in hybrid pension plans, reflecting the spectrum of sponsors’ workforce planning, compliance and other needs and goals. It examines eligibility requirements, definitions of applicable compensation, benefit formulas, interest rates and transition methods for cash balance plans (CBPs) and pension equity plans (PEPs). [December 2009]

FAS 123(R) Option Assumptions: The 2008 Results
Watson Wyatt recently completed its third annual analysis of stock option valuation assumptions and results under Statement of Financial Accounting Standards (SFAS) 123(R). From 2007 to 2008, the percentage of companies disclosing option fair values decreased from 73 percent to 72 percent. The median percentage increase in stock compensation expense from 2007 to 2008 was 2.4 percent. [December 2009]

DB Plan Funding Update: Extending the Analysis Period Shows the Need for Smoother Funding Relief
In a series of studies since the global financial crisis began, Watson Wyatt has projected the regulatory funded status and minimum required contributions for single-employer defined benefit (DB) plans, in the aggregate. It has serially updated the analysis to reflect changing market conditions, new regulations and enacted or proposed temporary legislative relief. The studies have contributed to fruitful discussions with sponsors, regulators and legislative staff in the pension community; indeed, the article published in the October 2009 Insider underlay Mark Warshawsky’s Oct. 1 testimony to the House Ways and Means Committee. This new study continues that effort by incorporating market conditions to Oct. 15, 2009, adding two proposed legislative relief provisions and extending the funding horizon out to 2013. [November 2009]

Watson Wyatt Testifies in Support of Funding Relief for DB Plan Sponsors
Testimony of Mark Warshawsky, Director of Retirement Research, Watson Wyatt Worldwide, presented to the House Committee on Ways and Means at the hearing “Defined Benefit Pension Plan Funding Levels and Investment Advice Rules,” Oct. 1, 2009. [October 2009]

Funding for DB Pension Plans in 2010 and 2011 Under Relief Proposals
While recent legislative and regulatory measures have given defined benefit (DB) plan sponsors some funding relief for 2009, required contributions for 2010 and 2011 have loomed large. In this analysis, Watson Wyatt projects funded status and required contributions for single-employer DB plans using an updated version of its comprehensive and realistic model of plan funding. It considers five scenarios: (1) the law prior to Sept. 24, 2009, including the Pension Protection Act of 2006 (PPA), the Worker, Retiree and Employer Recovery Act of 2008 (WRERA) and the March 2009 IRS guidance; (2) current law, including the IRS guidance released on Sept. 25, 2009; (3) House Education and Labor Committee bill (H.R. 2989) introduced in June 2009; (4) the main provisions of Representative Earl Pomeroy’s (D-N.D.) discussion draft released in August 2009; and (5) House Minority Leader John Boehner’s (R-Ohio) bill (H.R. 2021) introduced in April 2009. [October 2009]

Health Care Reform:
The Potentially Steep Price for Doing It Wrong
In late summer 2009, health care reform seems almost within reach. President Barack Obama is urging the Congress to pass bills, and both the House and Senate are trying to deliver. There is relatively widespread agreement on the necessity of reform, but the devil is in the details. [September 2009]

Hybrid Plan Sponsors Concerned About Lack of Regulatory Guidance
The Pension Protection Act of 2006 (PPA) established new rules for the operation and administration of hybrid pension plans, but plan sponsors are still waiting for guidance. The lack of final (or in a number of cases even proposed) guidance leaves hybrid sponsors in a difficult position — required to act without knowing the rules for doing so. Watson Wyatt recently conducted a survey to identify the issues most important to these plan sponsors. [September 2009]

Investing in Retirement Accounts: Analyzing Influences on Choice
Portfolio selections and investment returns play an important role in accumulating wealth. Studies have established that many workers need to allocate their assets more wisely, particularly participants in defined contribution (DC) retirement plans. Measures are being proposed or are under way to encourage better informed, smarter and more effective investment. For example, on the regulatory side, the Department of Labor has encouraged a greater use of equities as part of qualified default investment alternatives in retirement accounts. The effects of these measures and policies on individuals’ investment behavior remain to be seen. [September 2009]

Pension Freezes Continue Among Fortune 1000 Companies in 2009
From 2008 to 2009, the number of Fortune 1000 firms sponsoring a frozen defined benefit (DB) pension plan increased by 4 percent. The freeze rate has remained relatively constant over the last two years, as plan sponsors continue to seek ways to lower expenses, especially in the current economic downturn. [August 2009]

Retirement Prospects Dim for Many
Near-Retirees
For many workers, defined contribution (DC) plans and individual retirement accounts (IRAs) are their main savings vehicles. This trend gives employees greater responsibility for accumulating sufficient wealth to see them through retirement. Are workers, especially those approaching the end of their working career, saving enough? An analysis of account balances for near-retirees suggests widespread financial unreadiness for retirement looming, even before the stock and housing markets tumbled. [August 2009]

Investing in Retirement Accounts: Observed Patterns of Asset Allocation
Wealth accumulations in defined contribution (DC) retirement plans hinge on the investment portfolio and contribution rates. Yet a new Watson Wyatt analysis suggests that many DC portfolios fall short of optimal asset allocation. Plan sponsors and policymakers hoping to help workers balance their portfolios more effectively need to know how asset allocations vary among households with different economic and demographic characteristics.  [August 2009]

Acquisition Opportunities in Chapter 11: 363 Sales and Due Diligence
Restructurings in Chapter 11 under the U.S. Bankruptcy Code are undergoing a change. More and more Chapter 11 debtors simply can’t make it through a classic or typical restructuring, which can take 12 or more months and involve the complexities of negotiating a Plan of Reorganization and debating the value of the reorganized entity and each class of creditors’ claims. [July 2009]

Recession Undercuts Social Security and Medicare
The recently released annual reports from the trustees on the financial state of Social Security and Medicare show the current deep recession is taking a toll on the financing of both programs. The adverse consequences will occur in the short run — as outlays rise somewhat and, more significantly, revenues from payroll taxes fall — and in the long run, as the trust funds are smaller than expected. While the unsustainability of Medicare — caused mainly by rapidly rising health care costs — has been well known for some time, the imminent likely cash flow shortfall in Social Security’s finances is a more surprising and possibly more important development.  [June 2009]

Going Beyond Conventional Wisdom: Designing Executive Pay to Balance
Risk and Performance
A fundamental principle of modern financial theory is the inherent trade-off between risk and reward. To be attractive, riskier projects or investments must hold out the prospect of bigger rewards. At the corporate level, this risk premium is reflected in lower share prices for stocks and higher interest rates for bonds. But risk premiums and credit spreads are linked to attitudes toward risk and returns. When investors and companies are more willing to accept higher risks in pursuit of greater rewards, risk premiums and credit spreads tend to fall and aggregate risk levels rise.  [June 2009]

Economic Crisis Brings Job Losses, Delayed Retirement, Benefit Reductions and Stagnant Pay
The recession began in late 2007, and during the last quarter of 2008, there were 6,327 mass layoffs, generating 922,807 initial claimants for unemployment insurance. In January 2009 alone, 598,000 jobs were lost. But the statistics and news reports reflect only part of the picture. Many of those still working are receiving little or no increase in overall benefits and salary. In private industry, overall benefits and salary increased by 2.4 percent in 2008 — a 20 percent decline from the increase in overall benefits and salary in 2007, and a 40 percent drop from the increase in 2003. Expectations for benefits and pay increases are even less optimistic for 2009.  [April 2009]

Watson Wyatt Pension 100 — 2008 Disclosures of Funding, Discount Rates, Asset Allocations and Contributions
During the latter months of 2008, Watson Wyatt projected year-end pension funding status for accounting purposes at various times, capturing different interest rate and market environments. Now Watson Wyatt has analyzed actual funded status for the 100 largest pension sponsors among publicly traded companies with year-end 2008 fiscal dates, as disclosed in their Securities and Exchange Commission (SEC) 10-K filings. During 2008, actual funding ratios in this group declined by an average of 28 percentage points.  [April 2009]

‘Value at Risk’ for Pension Plans to Rise in 2009 According to Watson Wyatt PRI
Having gradually worked back up to full funding after challenging financial-market conditions earlier in the decade, pension plan sponsors find themselves deep in another financial crisis. And the effect on pension plan funding has sharpened concerns about pension risks. [March 2009]

In the Wake of the Financial Crisis
Expert opinion has a relatively optimistic outlook, sees significant changes in investment and is very concerned about retirement security. [February 2009]

Dramatic Drops in Interest Rates Forecast Much Lower DB Plan Funding Status on Accounting Basis for 2008
An earlier Watson Wyatt analysis of pension funding in 450 Fortune 1000 firms projected an 8 percent decline in their defined benefit (DB) pension funding status under an assumption that the market conditions of Oct. 15 would persist through 2008. But interest rates have fallen by more than 200 basis points since then, and we are now projecting a much bigger 29 percent drop in funding status.  [February 2009]

The Future of DB Plan Funding Under PPA, the Recovery Act and Relief Proposals
The overlay of the dramatic decline in asset values of the last few months on the incipient tougher funding requirements of the Pension Protection Act of 2006 (PPA) has prompted widespread concern about the magnitude of the required contributions to single-employer defined benefit (DB) plans in 2009 and 2010.  [January 2009]

FAS 123(R) Option Assumptions: The 2007 Results
Watson Wyatt recently completed its second annual analysis of stock option valuation assumptions and results under Statement of Financial Accounting Standards (SFAS) 123(R). From 2006 to 2007, the percentage of companies disclosing option fair values decreased from 74 percent to 73 percent, and the number disclosing stock compensation expense increased from 93 percent to 94 percent. Median stock compensation expense increased by 9 percent in 2007.  [January 2009]

Many Older Workers Unaware of Retirement Distribution Options
As workers approach retirement, they must make decisions that will affect their long-term financial futures. One of these is choosing the form of distribution from their defined benefit (DB) plan and defined contribution (DC) account. While there might be several distribution options, for many DB plan participants it comes down to a choice between a life annuity and a lump sum. But how many older workers know enough to make an informed decision? [January 2009]

The Magnitude of Pension Deficits Compared With Firm Value Likely to Increase by Year-End
Plan sponsors and others are concerned about the business risks posed by pension plans, particularly in today’s unpredictable market conditions. In this case, “risk” refers to a company’s exposure arising from pension deficits. At the end of 2007, the ratio of pension plan deficits to market capitalizations (current risk) for FORTUNE 1000 firms was small due to the rise in funding levels.  [November 2008]

House Prices, Financial Markets, Government Intervention and the U.S. Economic Outlook
When he made his urgent request on Sept. 19 to Congress for the federal government to buy distressed assets, Treasury Secretary Henry Paulson stated that “[t]he underlying weakness in our financial system today is the illiquid mortgage assets that have lost value as the housing correction has proceeded. … These troubled loans are now parked, or frozen, on the balance sheets of banks and other financial institutions, preventing them from financing productive loans. The inability to determine their worth has fostered uncertainty about mortgage assets and even about the financial condition of the institutions that own them.”  [November 2008]

Year-End Pension Accounting Declines Might Be Milder Than Expected
Unsurprisingly, the value of pension plan assets has dropped sharply so far this year, and under Financial Accounting Standard (FAS) 158, funded status for 2008 will decline for most pension plans. However, today’s higher discount rates will soften the drop considerably. Despite the dramatic drops in the stock market during early October, we project only a moderate decline in average funding status — from 96 percent in 2007 to 88 percent in 2008.  [November 2008]

Pension Funding Improves for 2007
Pension funding has been much in the news during the last decade and over the last several years, most of the news has been positive. A Watson Wyatt analysis of defined benefit plan funding for the FORTUNE 1000 shows that plan funding improved again in 2007, and many pensions ended their fiscal year with significant surpluses. Funding received a boost from favorable asset returns and an increase in interest rates during 2007.  [October 2008]

Social Security, Medicare and Americans’ Confidence in Their Retirement Future
Academics, policymakers and the media have been sounding alarms about shortfalls ahead for Social Security and Medicare for some time now. And many Americans have taken their warnings to heart, according to Watson Wyatt’s 2007 U.S. Survey of Older Employees’ Attitudes Toward Lump Sum and Annuity Distributions From Retirement Plans. Roughly 61 percent of older workers — those 50 to 64 years old — are not confident of receiving unreduced Medicare benefits, and 52 percent are not confident of receiving unreduced Social Security benefits, according to the survey. [September 2008]

Pension Freezes Continue Among the FORTUNE 1000, Albeit at a Slower Pace
From 2007 to 2008, the proportion of defined benefit (DB) plan sponsors in the FORTUNE 1000 that had a frozen plan increased by five percentage points, according to a recent Watson Wyatt study. The rate of annual increase in the total number of sponsors of frozen DB plans climbed sharply from 2004 to 2006 — when it peaked — and has declined since then. [September 2008]

Projecting Health Care Cost Trends: Observations on the SOA’s New Model
Financial Accounting Statement (FAS) 106 requires companies to report and accrue their obligations for postemployment benefits — including retiree health plans — for current and future retirees. The rate of growth in the cost of health care benefits, which must be projected well into the future, can be the most significant assumption in calculating the obligation, a present-value item. So the model and assumptions used in these projections are critical. [July 2008]

The Role of Employer-Provided Benefits in Americans’ Confidence About Retirement
Journalists and researchers have focused considerable attention on the baby boomers’ retirement readiness, as well as the retirement prospects for later generations. While expert opinion provides a valuable perspective, the expectations of American workers themselves are also important. Rising health costs, the economic downturn, the spiraling cost of gas and the slumping housing market have eroded many workers’ confidence in a comfortable retirement future. Inadequate retirement and health benefits may exacerbate workers’ worries, prompting many to delay retirement. [June 2008]

Defined Benefit vs. 401(k) Plans: Investment Returns for 2003-2006
Watson Wyatt has been comparing rates of return between defined benefit (DB) and defined contribution (DC) plans for more than 10 years. This most recent comparison finds that between 1995 and 2006, DB plans outperformed DC plans by an average of 1 percent per year. Earlier studies also found that, over time, DB plans attained higher returns than did 401(k) plans.  [June 2008]

Retirement Plan Contributions, Benefits and Assets: Highlights From Form 5500 Reports
Tracking the flow of money into and out of different types of retirement plans can identify broad and sometimes dramatic trends and behavior. For example, benefit disbursements from defined contribution (DC) plans are more erratic than those from defined benefit (DB) plans, partly because DC disbursements fluctuate along with the stock market. Contributions to DB plans have been much more erratic than those to DC plans, due to changes in funded status driven by market fluctuations and the operation of funding laws that tightly controlled permitted and required contributions. So in some years DB plan sponsors that wanted to contribute to their plans could not, while in other years sponsors were forced to contribute large amounts. [May 2008]

IRS Delays Effective Date for 403(b) Regulations
The IRS has delayed the general effective date for the regulations regarding section 403(b) arrangements that were proposed in 2004 (including the related controlled group regulations under section 414(c)). [October 2006]

Lessons From Watson Wyatt's 2005 HCI: HR Programs, Turnover Risk and Employee Productivity
Eight years of research into Watson Wyatt's Human Capital Index® (HCI) has consistently found a strong correlation between effective HR program design and financial performance. [January 2006]

Get the Most Out of Your Company's Turnover — Lessons from Watson Wyatt's Human Capital Index
The Watson Wyatt Human Capital Index® links effective human capital management with overall firm performance. [October 2005]

Maximizing the Returns on Investments in Human Capital — Lessons From Seven Years of Global Studies
Since 1998, Watson Wyatt's Human Capital Index® (HCI) has been tracking the link between human capital management and firm performance. [September 2005]

Retirement Costs: Something's Happening Here, and What It Is, Is Exactly Clear
Can America Afford to Grow Old? is the title of a book written by three economists at the Brookings Institute and published in 1988. The book title, along with much else written on the subject since then, suggest that the answer is no. [November 2004]

U.S. Workers Say Performance Management Doesn’t Make the Grade
According to WorkUSA® 2004, a survey of the attitudes and opinions of U.S. workers, most employees do not believe their company’s performance management program actually improves performance.  [June 2004]

Communication Key to Improving Bottom Line
Effective corporate communication appears to boost both profits and employee satisfaction, according to Connecting Organizational Communication to Financial Performance — 2003/2004 Communication ROI Study™.  [November 2003]

Tight Labor Markets Are Just Around the Corner…Again
The February unemployment rate fell to 5.5 percent from its December high of 5.8 percent. As the economy moved into recession last fall — exacerbated by the terrorist attacks on September 11 — Watson Wyatt predicted that the U.S. labor markets would likely firm up again fairly quickly once the economy started to recover. [April 2002]

Employers’ Report on Early Retirement Windows:
In today’s slowing economy, many companies are looking for ways to trim their labor costs without resorting to layoffs. For some employers, one answer is encouraging more workers to retire early. An early retirement window offers workers extra retirement incentives for a limited period of time. A recent Watson Wyatt survey found that 17 percent of U.S. companies have offered early retirement windows over the past three years. [December 2001]

Executive Pay in the Land of Opportunity
Executive pay in the United States reflects one of the founding values of our country: It is the land of opportunity. This year's report on executive pay reinforces this belief and confirms findings from previous years; namely, that there is a correlation between executive pay programs and company performance. [March 2001]

Finding the Sweet Spot— Stock Option Overhang
Notwithstanding the current downward trend in the stock market, returns to investors over the past decade have been phenomenal. There are many factors behind this stock market performance, but much of the growth can be attributed to the increased use of stock-based incentive compensation (especially stock options) to link the interests of employees and shareholders. [January 2001]

Global Aging: The Challenge of the New Millennium
Several Insider articles have focused on how our aging population and shrinking workforce are affecting both our Social Security system and U.S. employers' retirement plans. But people are getting older and living longer all over the world. And these demographic trends will impose extraordinary worldwide economic, social and political stress, according to a new study, Global Aging: The Challenge of the New Millennium, by Watson Wyatt Worldwide done in partnership with the Center for Strategic and International Studies for the Commission on Global Aging.  [August 2000]

The Complete Guide to Mergers and Acquisitions
Although there are a record number of mergers and acquisitions taking place, far too many fall short of their financial and strategic goals. The fact is that it is much easier to make a deal than to make a deal work. M&A failure often occurs on the "people" side of the equation, and begins when change dynamics heighten employee resistance to the newly formed company. [April 2000]

A Comprehensive Analysis of the Shift from Traditional Pensions to Hybrid Plans
This is the Executive Summary of the report "The Unfolding of a Predictable Surprise: A Comprehensive Analysis of the Shift from Traditional Pensions to Hybrid Plans."  [March 2000]

Linking Communications with Strategy to Achieve Business Goals
Workers are bombarded with hundreds of messages and bits of information every day — some of it useful, but much of it not really relevant. And the volume of these communications only seems to increase. Amidst all of this "noise," how can organizations communicate effectively with employees?  [August 1999]

From Benefits to Business Results: Creating a Line of Sight
For the fourth year in a row, the Washington Business Group on Health (WBGH) and Watson Wyatt Worldwide surveyed U.S. employers on purchasing value in health care. This year, 293 organizations participated, with health plans covering nearly 9.3 million employees and dependents.  [April 1999]

Workforce Management: Strategic Retirement Design
This is the third article in an occasional series that introduces Workforce Management—a new framework for attracting, retaining and motivating workers.  [October 1998]

Workforce Management: The Cultural Shift
This is the second article in an occasional series that will introduce Workforce Management — a new framework for attracting, retaining and motivating workers.  [August 1998]

Disability Management: The Key to Staying @ Work
Throughout the United States, employers are faced with rising disability and health care costs. According to calculations based on Census Bureau data, by the year 2000 total disability costs will top $340 billion—double what they were at the start of the decade.  [August 1998]

Workforce Management: The Challenge
This is the first article in an occasional series that will introduce workforce management—a new discipline that Watson Wyatt is pioneering.  [June 1998]

Competing in a Global Economy
Andy Grove, CEO of Intel, recently pointed out the importance of companies knowing where they are in the life cycle of their business: "There is at least one point in the history of any company when you have to change dramatically to rise to the next level of performance. Miss that moment and you start to decline."  [March 1998]