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United States
New York , 7 October 2009

There have been six consecutive months of positive US equity performance over the past two quarters. Such periods of sustained positive equity performance do not occur frequently. However, despite this performance, the funded status of pension plans sponsored by S&P 1500 companies declined from 84 percent to 81 percent over the same six-month period, according to the latest estimates by Mercer Investment Consulting, Inc. (Mercer). The declining yield on “high quality” corporate bonds is causing an increase in the value of pension plan liabilities, offsetting the growth in equity values.

According to Mercer’s analysis, the funded status of pension plans sponsored by S&P 1500 companies remained broadly unchanged during August, but was down from 82 percent to 81 percent over the third quarter and down from 84 percent since the end of March. The estimated aggregate deficit at the end of September was $300 billion, compared with $278 billion at the end of August and $245 billion at the end of June. The 2008 year-end deficit was $409 billion, corresponding to a funded status of 75 percent.

The Mercer analysis also shows that if the funded status were to remain unchanged through the fourth quarter, the 2010 pension expense for S&P 1500 companies will be $41 billion. This will be lower than the pension expense reported in 2009 financial statements, estimated to be around $55 billion, but still substantially higher than the 2008 reported pension expense of $21.7 billion in 2008.

Additionally, Mercer anticipates that many plan sponsors will face a substantial increase in their required cash contributions for 2010.¹  Cash contributions are determined under the Pension Protection Act (PPA) rules, which include options for smoothing in assets and liabilities. As a result, some of the losses from 2008 were deferred so that the full impact of the increase is difficult to quantify.

“With the strong recent positive equity returns, many would expect the financial position of pension plans to have improved. Indeed, our estimates show that pension plan asset values have grown by an average of 24 percent over the last six months. This growth in asset values has been equally matched by the growth in liability values, which also grew at 24 percent,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement programs.

“As we move into the final quarter of the year, many companies will be finalizing budgets for 2010. Unless the financial position of pension plans improves during the last quarter this will be the second consecutive year that company balance sheets will reflect substantial pension plan deficits. Additionally 2010 pension expense figures, which that are calculated based on the year-end 2009 balance sheet position, again will be high compared to recent history. This also comes at a time when companies are facing pressure on revenues and profits. In 2007, the pension expense accounted for 4.7 percent of company’s net income. In 2008 this ratio had increased to 5.9 percent. We anticipate that the 2009 and 2010 ratios will be even higher,” said Mr. Hartshorn.

“Companies will also need to plan for higher cash contributions. Contribution requirements are determined under the Pension Protection Act. Despite the somewhat greater flexibility over the timing of contributions granted by legislative and regulatory relief, fundamentally pension plans are still underfunded and there will be a phasing in of increased contribution requirements to fund the deficits. This also comes at a time when we expect that plans will have little or no credit balance amounts available to help pay these contributions,” Mr. Hartshorn continued.

“As part of a regular monitoring process many plan sponsors and fiduciaries now receive regular updates on both asset and liability performance. This allows efficient and effective budgeting and monitoring in the lead up to year-end,” he added.

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 based on projections of their reported financial statements 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, 2008, was $1.21 trillion, compared with estimated aggregate liabilities of $1.62 trillion. Allowing for changes in financial markets in 2009 year-to-date, the estimated aggregate assets were $1.23 trillion, compared with the estimated value of the aggregate liabilities of $1.53 trillion.

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.

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. 

For more information, visit www.mercer.com.

Figure 1.

Source: Mercer, October 1, 2009.

Sample Data Points:

[1]For further detail, please see testimony of Craig P. Rosenthal, Mercer principal, before House Committee on Ways and Means Oct. 5, 2009, hearing on Defined Benefit Pension Plan Funding Levels and Investment Advice Rules.

[2]Assumed duration of approximately 10 years. Based on Mercer Yield Curve mature plan index rate.

[3]Includes price changes only; total returns also include dividends.

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