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The overall financial health of US corporate defined benefit (DB) pension plans declined in 2011 and 2012 is shaping up as another challenging year, according to a new in-depth analysis by Mercer. The funded status of pension plans sponsored by companies in the S&P 1500 declined from 81% on December 31, 2010, to 75% on December 31, 2011. Funded status continued to decline in 2012, as these plans hit a record low of 70% as of July 31, representing a shortfall of $689 billion.
In the report How Does Your Retirement Program Stack Up? – 2012 (available at www.mercer.com/retirementbenchmarking), Mercer presents an in-depth analysis of retirement program data disclosed by the S&P 1500 companies in their 10-K reports for 2011. This analysis supplements Mercer’s monthly update of funded status of these plans and enables companies to better understand how pension costs affect their overall cost structures, risk profiles and competitive positions.
“While large US corporations contributed over $70 billion to their defined benefit plans in 2011, the overall funding deficits at year-end 2011 reverted to 2009 levels,” said Eric Veletzos, principal and consulting actuary with Mercer’s Retirement, Risk & Finance business, and the study’s primary author. “Liability growth exceeded asset returns for the fourth consecutive year, offsetting these contributions.”
The median asset return for 2011 was 2.9%, down from 12.1% in 2010 and 18.5% in 2009. Meanwhile, the median pension liability grew by 13.7% in 2011, the third consecutive year with liability growth in excess of 10%. The high liability rate of growth is driven by decreasing interest rates. As of June 30, 2012, asset returns have declined even more, in part driven by the uncertain economic outlook, the European sovereign debt crisis and downgrades of credit ratings of several major global financial institutions.
“The prevalence of ‘risky’ plans among S&P 1500 companies increased from 4.7% during 2010 to 7.1% during 2011, an increase of nearly 70%,” said Mr. Veletzos. “These plans are poorly funded and more material compared to the size of the corporations, so pension risk is a major issue for these organizations.”
“We have also seen a continued decline in sponsors’ expectations of asset returns for the future,” he continued. “The median expected return declined from 7.92% to 7.73% at year-end 2011, likely due to a gradual movement away from higher risk assets, such as equities, combined with lower expectations of future market returns.”
“Pension risk management has become a top priority for many plan sponsors,” said Jacques Goulet, senior partner and US leader of Mercer’s Retirement, Risk & Finance business. “Sponsors that have employed strategies to control market fluctuations in funded status through dynamic investment policies, liability-driven investing and other risk management strategies have seen a decline in funded status volatility. Furthermore, we are seeing increased interest in risk transfer strategies, such as lump-sum cash-outs and annuitization, as ways to manage pension risk.”
About the study
Mercer based its analysis primarily on information contained in the 10-K reports filed by the companies in the S&P 1500 for the 2011 fiscal year, as provided by Capital IQ, a Standard & Poor’s business. The complete report, How Does Your Retirement Program Stack Up? – 2012, is available online at www.mercer.com/retirementbenchmarking.
For more information about how Mercer assists employers with their retirement plans, go to www.mercer.com/retirement. For a custom analysis on how your particular employer-sponsored retirement program stacks up against the S&P 1500 companies, please contact your local Mercer consultant.
Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. 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 www.mercer.com. Follow Mercer on Twitter @MercerInsights.