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The modest funding gains of US corporate pension plans in September were erased last month, , with the aggregate deficit in pension plans sponsored by S&P 1500 companies increasing by $26 billion during October, to $619 billion, according to new figures from Mercer . This deficit corresponds to an aggregate funded ratio of 72% as of October 31, 2012. This is slightly above the record low funded ratio of 70% seen at July 31, 2012, at which point the aggregate deficit was $689 billion.
The combination of equity markets dropping approximately 2% during October and discount rates falling about 6 basis points during the month increased the funding deficit. Mercer projects a significant increase in year-end balance sheet adjustments and P&L expense for many plans for 2013 and beyond.
“Interest rates remain stubbornly low, with little prospects for a significant increase before year end” said Richard McEvoy, leader of Mercer’s Financial Strategy Group. “It is now likely that many plan sponsors will be facing significant pension deficits at the end of this calendar year. This will mean higher year end balance sheet deficits and P&L expense for 2013.”
“Other than the funded status movement, the big development in October was Verizon’s landmark $7.5B annuity purchase” said Mr. McEvoy. “This is further evidence that plan sponsors are seriously beginning to address pension risk, and we expect this trend to accelerate in 2013.”
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 adjusted from each company’s financial year-end to October 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 October 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 $2.19 trillion as of October 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.
Information on the Mercer Yield Curve is available at www.mercer.com/pensiondiscount.
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 www.mercer.com. Follow Mercer on Twitter @MercerInsights.