US Corporate Pension Plan Deficit at End-September Reaches a
Post-World War II High, According to Mercer Analysis (press release)
Funding levels plummet during the month as equities values dropped and
bond yields fell
NEW YORK, Oct 04, 2011 (BUSINESS WIRE)
-- The aggregate deficit in pension plans sponsored by S&P 1500 companies
increased by $134 billion during September, from a deficit of approximately
$378 billion as of August 31, 2011, to $512 billion as of September 30,
according to new figures from Mercer(1). This deficit corresponds to an
aggregate funded ratio of 72% as of September 30, compared to a funded ratio of
79% at August 31, 2011 and 81% at December 31, 2010. Mercer believes that the
end-of-month pension funding levels for the S&P 1500 are at a post-World
War II low. The previous low point for funding was August 31, 2010 when the aggregate
funded ratio was 71% but the deficit at that point of $507 billion has grown as
liabilities have increased.
The decline in funded status was driven
by a 7.0% drop in equities, and a fall in yields on high quality corporate
bonds during the month. Discount rates for the typical US pension plan
decreased approximately 30-40 basis points during the month. Mercer's analysis
indicates the S&P 1500 funded status peaked at 88% at the end of April, and
has since seen a 16% decline.
"The end of September marks the
largest deficit since we have been tracking this information," said
Jonathan Barry, a partner in Mercer's Retirement Risk and Finance business.
"Over the past 3 months, we have seen nearly $300 billion of funded status
erode. This will have significant consequences for plan sponsors. It will be
particularly painful for organizations with September 30 fiscal and/or plan
year ends.
"With no expectation for a quick
recovery, plan sponsors should evaluate the effects of the recent turmoil on
their future cash requirements, as well as the impact on their P&L and
balance sheet," said Mr. Barry. "For some sponsors, the recent drop
could result in falling below certain funding level thresholds under PPA which
could lead to restrictions on lump sum payments and at the more extreme end,
could result in a total freeze of benefit accruals."
"The recent market turmoil is a
reminder to plan sponsors of the need for a pension risk management strategy
that is aligned with corporate objectives," said Kevin Armant,
a principal with Mercer's Financial Strategy Group. "Those that were aware
of the risks and can deal with the increased cash funding and P&L charges
associated with the current market downturn may choose to stay the course.
Those that can't will continue to evaluate risk reduction opportunities,
including increasing interest rate hedging programs, moving more into long
corporate bond allocations or transferring risk through the introduction of a
lump sum payment option or purchasing annuities. For both types of
organizations, it's likely that additional cash funding will be required and it
may be useful to look at the option of accelerating those contributions, as
some sponsors may have the capacity to take advantage of the low interest rate
environment by borrowing to fund."
Mercer estimates the aggregate combined
funded status position of plans operated by S&P 1500 companies on a monthly
basis. Figure 1 shows the estimated aggregate surplus/(deficit)
position and the funded status of all plans operated by companies in the
S&P 1500. This is based on projections of their reported financial statements(2) adjusted from each company's financial year
end to September 30 in line with financial indices. This includes US domestic
qualified and non-qualified plans and all non-domestic plans. The estimated
aggregate value of pension plan assets of the S&P 1500 companies at
December 31, 2010, was $1.37 trillion, compared with estimated aggregate
liabilities of $1.68 trillion. Allowing for changes in financial markets though
the end of September 2011, changes to the S&P 1500 constituents and newly
released financial disclosures, the estimated aggregate assets were $1.31
trillion, compared with the estimated aggregate liabilities of $1.83 trillion
as of September 30, 2011.
Continued at …… http://www.marketwatch.com/story/us-pension-plan-deficit-at-end-september-reaches-a-post-world-war-ii-high-according-to-mercer-analysis-2011-10-04