E-mail this page				Print this page

Contact: Mercer Feedback

United States
New York , 8 July 2009

After several months of record high credit spreads, falling yields on corporate bonds and rising yields on Treasuries are having a negative impact on the funded status of pension plans, according to the latest estimates by Mercer.

According to the Mercer analysis, the funded status of pension plans sponsored by S&P 1500 companies deteriorated by $78 billion from the end of April, bringing the estimated aggregate deficit to $245 billion at the end of June, up from $167 billion at the end of April. The aggregate funded status was 82 percent at the end of June, down from 87 percent at the end of April. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75 percent.

“After peaking at around 7¾ percent at the end of April, the yield implied by the Mercer Discount Yield Curve has fallen to slightly more than 6¾ percent at the end of June. This change adds between 10 percent and 15 percent to the value of the liabilities for a typical plan,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement programs.

“The change in the yield on the Mercer Discount Yield Curve is indicative of the volatility that has taken place in the bond markets,” Mr. Hartshorn continued. “A particularly interesting development has been the divergence of the return on Treasury bonds and the return on corporate bonds. Plan sponsors need to carefully consider their bond portfolios when making investment decisions and balance the competing risk return characteristics of credit bonds and Treasury bonds. Relatively small changes in the allocation of the bond portfolio can significantly affect asset performance relative to the liabilities.”

The decline in funded status comes despite a continued improvement in equity markets (during May and June, the S&P 500 total return index was up 5.8 percent). The improvement in equity values was more than offset by declining Treasury values and an increase in liabilities caused by declining corporate bond yields. The net result was a decline in funded status (the difference in the value of plan assets and the value of plan obligations).

“The changes in funded status of plans will not be recognized in company financial statements until the next financial year end (which is December 31, 2009, for many companies). However, many companies will be starting to set budgets for 2010. There are going to be some tough decisions over the coming months, with companies seeking to balance the demands of investing for the economic recovery and maintaining sufficient working capital to meet short-term expenditure. The inherent uncertainty in the pension costs (both cash cost and pension expense) is particularly unwelcome,” said Mr. Hartshorn.

Mercer estimates the total combined funded status position of plans operated by S&P 1500 companies on a monthly basis. Figure 1 shows the estimated 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. This includes US domestic qualified and non-qualified plans and all non-domestic plans. The figures provided in Figure 1 are estimates based on financial indices. The estimated total value of pension plan assets at December 31, 2008, was $1.21 trillion, compared with estimated liabilities of $1.62 trillion. Allowing for changes in financial markets in 2009 year-to-date, the estimated assets were $1.10 trillion, compared with the estimated value of the liabilities of $1.35 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.

Source: Mercer, July 1, 2009.

Sample Data Points:

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

2 Includes price changes only; total returns also include dividends.

E-mail this page

Print this page

Contact: Mercer Feedback