I thought this might be of interest, Parney give a good explanation on the LLNL Pension. The graph, which is very informative, is also attached.
Status of the LLNS Defined Benefit Pension Plan
As discussed at my January all-hands talk, I'd like to provide some more information about the funding status of the defined benefit pension plan and how its liabilities and funding level are determined. Note that this applies only to those employees who selected Total Compensation Plan 1 (TCP1) when they transitioned to LLNS on Oct. 1, 2007. (All other employees -- those who selected TCP2 and those hired since Oct. 1, 2007 -- are not affected.)
I want to emphasize that DOE/NNSA has repeatedly stated that they understand their responsibilities and commitment to fund contractor pension plans.
The graph below shows the plan's assets (left-hand scale), funded ratio (right-hand scale), and liability levels. As you can see, the return on assets has been quite good, growing from $1.58 billion when the assets were transferred from the UC Retirement Plan (UCRP) to $1.86 billion on Dec. 31, 2011, for an overall increase of 17.7 percent. This is significantly better than the performance the S&P 500 Index, which gained 7.3 percent during the same period. Since its inception, our plan's investment performance has been in the top third of similarly sized plans in the U.S.
Over this same period however, our plan's liabilities have grown by 125 percent, from about $800,000 at the plan's inception to almost $1.8 billion on Dec. 31, 2011. The reason for this is twofold. Liabilities have grown because plan participants continue to earn additional benefits based on increasing salary, age and years of service. This growth was fully expected and results in about half of the increase in liabilities.
The other driver for the increase in the plan's liabilities and the decline in its funded ratio has been the unprecedented drop in interest rates. Specifically, since the plan's inception, corporate bond yields have declined from about 6.5 percent to 4.9 percent. These rates are important because they are the interest rates used (as required by the Pension Protection Act of 2006) to calculate the present value of current benefits for the plan -- that is, the plan's liabilities. As these interest rates decline, the plan's liabilities increase.
As with most defined benefit pension plans, our plan is extremely sensitive to changes in these interest rates because of the age demographics of our plan's participants (average age about 50 years), because of the long period that benefits will be paid to participants and their beneficiaries (about 80 years), and because all Lab retirees prior to contract transition remained in UCRP. This is the overriding reason the plan's funding level has declined from 219 percent at the plan's inception to 104 percent on Jan. 1, 2012.
As you have undoubtedly read or heard in the news media, interest rates are at an all-time low. In order to encourage economic growth, the Federal Reserve has committed to keeping interest rates at or near their current level until 2014. As a result, we do not expect our defined benefit pension plan to start a meaningful recovery for at least a couple of years.
Contributions are not legally required at this time. They will be required when the plan's funding ratio drops such that the surplus assets are insufficient to cover the normal ongoing benefit increases. We have presented this information, along with projected contribution requirements, to NNSA and requested the start of employer and employee contributions to prevent future funding shortfalls.
I am continuing to work with NNSA to resolve this situation. I am committed to ensuring the future financial solvency of our defined benefit pension plan and will elevate the issue to increasingly higher levels as necessary to achieve this goal.
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