US corporate pension plans’funding

United States , New York

Publication date: 3 August 2012

The aggregate deficit in pension plans sponsored by S&P 1500 companies grew $146 billion during July, to a record high $689 billion, according to new figures from Mercer[1]. This deficit corresponds to a record low aggregate funded ratio of 70% as of July 31, 2012, compared to a funded ratio of 74% as of June 30, 2012, at which point the aggregate deficit was $543 billion.

Although US equity markets rose 1.4% during July[2], discount rates[3] fell another 30 to 55 basis points resulting in liability increases ranging from 3% to 11% during the month. The continued fall in US Treasury yields and the narrowing of corporate bond credit spreads led to discount rates hitting a new all-time low for the third consecutive month.

“This record deficit proves that pension funded status volatility is showing no sign of abating, breaking the previous low of 71% at the end of August 2011,” said Jonathan Barry, a partner with Mercer’s Retirement, Risk & Finance consulting group. “As we have turned past the halfway point for the year, sponsors really need to take a close look at how these deficits might impact their 2013 financials. Absent a significant rise in rates over the next five months, sponsors will be looking at higher year-end balance sheet deficits and P&L expense for 2013.

“NCR's recent announcement of accelerated cash funding and offering terminated vested participants a lump sum payment shows that options beyond funding the minimum required can still be very attractive,” said Kevin Armant, a principal with Mercer’s Financial Strategy Group. “Sponsors also need to take a close look at the impact of market conditions and recent legislative changes on their funding strategy. Funding stabilization, enacted as part of MAP-21, will give sponsors an opportunity to lower near-term contribution requirements. But companies need to also consider the true economic deficit they are now facing, and may want to contribute more than is now required in order to help address this record deficit.”

Mr. Armant added: “The impact of higher Pension Benefit Guaranty Corporation premiums and the potential ability to borrow at low rates to meet funding requirements come into play as well and comparing the alternatives requires careful analysis.”

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[4] adjusted from each company’s financial year-end to July 31 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, 2011, was $1.45 trillion, compared with estimated aggregate liabilities of $1.93 trillion. Allowing for changes in financial markets through the end of July 2012, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.57 trillion, compared with the estimated aggregate liabilities of $2.26 trillion as of July 31, 2012.

Notes for editors

Unless otherwise stated, the calculations are based on the Financial Accounting Standard (FAS) funding position and include analysis of the S&P 1500 companies.

About Mercer

Mercer is a global leader in human resource consulting and related services. The firm works with clients to solve their most complex human capital issues by designing and helping manage health, retirement and other benefits. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit http://www.mercer.com/. Follow Mercer on Twitter @MercerInsights.

[1]Figures provided by Mercer Investment Consulting, Inc.

[2]As measured by the S&P 500 total return index.

[3]Determined using the Mercer Pension Discount Yield Curve.

[4]Source of financial statement data: Standard & Poor’s Capital IQ. Standard and Poor’s is a division of The McGraw-Hill Companies, Inc.

US corporate pension plans' funding deficit reaches all-time high