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The aggregate deficit in pension plans sponsored by S&P 1500 companies grew $59 billion in the first half of 2012, to $543 billion, according to new figures from Mercer1 . This deficit corresponds to an aggregate funded ratio of 74% as of June 30, 2012 compared to a funded ratio of 75% as of December 31, 2011, at which point the aggregate deficit was $484B.
Although US equity markets rose by 4% during June as measured by the S&P 500 total return index, discount rates used to measure the pension liability fell by 24 to 32 basis points during the month, as measured by the Mercer Pension Discount Yield Curve. The yield curve hit an all time low for the second consecutive month, due primarily to the Moody’s action downgrading the credit ratings of 15 major banks on June 21. Because a number of the banks lost their AA credit ratings, they are now excluded from yield curves used to set pension accounting discount rates.
Sponsors did see some relief, however, as the passage by Congress of the Highway and Student Loan bill included a provision that will reduce the funding requirements for corporate plans, by establishing a corridor around the 25-year average of interest rates used to determine liabilities in the calculation of minimum contribution requirements. Plans that would otherwise fall below key funding thresholds will now have more time to improve the funding levels and avoid restrictions on their ability to pay some accelerated benefit forms, such as lump sums.
“While these lower near-term contribution requirements will, rightly, be welcomed by many plan sponsors, the reduction in funding could lower overall funded status of US pension plans in the short term.” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business. Mercer estimates that the relief could be in the range of $40 to $50 billion for S&P 1500 plan sponsors for 2012 and could total well over $100 billion through 2014. “All things being equal, that reduction in funding will reduce overall funded status from what it would otherwise have been had funding stabilization not been passed,” said Mr. Barry. “We suggest that plan sponsors take the opportunity to review their pension contributions in light of both the new rules and their broader pension risk management framework. The increase in PBGC premiums that come with the new legislation certainly give sponsors an incentive to keep their plans well funded.”
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 statements2 adjusted from each company’s financial year end to June 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, 2011, was $1.45 trillion, compared with estimated aggregate liabilities of $1.93 trillion. Allowing for changes in financial markets though the end of June 2012, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.55 trillion, compared with the estimated aggregate liabilities of $2.09 trillion as of June 30, 2012.
1 Figures provided by Mercer Investment Consulting, Inc.
2 Source of Financial Statement Data: Standard & Poor’s Capital IQ. Standard and Poor’s is a division of The McGraw-Hill Companies, Inc.
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.
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Figure 2: Sample Data Points
3 Assumed duration of approximately 11 years. Based on Mercer Yield Curve Mature Plan Index rate.
4 Includes price changes only; total returns also include dividends.