Fueled by strong assets and an increase in discount rates, the funding health of defined benefit pension plans at S&P 500 companies increased for the second straight year in 2007, according to a new analysis by Mercer.

The median funded status rose from 89% in 2006 to 94% in 2007, and aggregate pension assets exceeded aggregate pension liabilities for the first time since the end of 2001.

Although the funded status rate increased in 2007, no clear trend has emerged with implications for year-end funded status. The turbulent capital markets and economic environment of 2008 have exposed plan sponsors to significant equity market and interest rate risk, according to Mercer's analysis.

As plan sponsors continued to take investment risks, actual asset returns (9.6%) exceeded the expected return assumption (8.25%) and the liability assumption (3.3%) in fiscal 2007, although the returns are lower than the fiscal 2006 asset returns (13.3% at the median).

Because pension assets exceeded benefit obligations for U.S. plans, plan sponsors might not be obligated to fund any more than their typical cost when the new funding rules of the Pension Protection Act of 2006 go into effect in fiscal 2008, Mercer reports.

In fact, ongoing benefit costs decreased slightly as some of the most lavish pension and post-retirement medical plans were scaled back. On average, companies that supply ongoing DB pensions provided slightly higher total retirement benefits, which came with slightly higher costs.