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United States
New York , 6 August 2009

Having seen some recovery from the 2008 year-end lows, the funded status of pension plans sponsored by S&P 1500 companies fell again in July for the third consecutive month, according to the latest estimates by Mercer. Although equity values are increasing, so is the value of plan liabilities – caused by falling yields on corporate bonds – so that the net impact in July was a decline in the funded status.

According to the Mercer analysis, the funded status of pension plans sponsored by S&P 1500 companies deteriorated by $34 billion during the month of July, bringing the estimated aggregate deficit to $279 billion at the end of July, up from $245 billion at the end of June. The aggregate funded status was 81 percent as of July 31, down from 82 percent at June 30. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75 percent.

“There was a strong positive return from equities of 7.4 percent during July. This helped increase the estimated aggregate value of assets of pension plans sponsored by S&P 1500 companies by 6.2 percent. However, falling yields on AA corporate bonds (the yield on the Mercer Yield Curve fell from 6.79 percent to 6.10 percent in July) means that the liability values of pension plans for the same companies increased by 7.6 percent. Companies should focus attention on the return relative to the liabilities, which was negative 1.3 percent,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement programs.

“We believe that measuring asset return relative to liabilities provides sponsors with a more informative perspective on the changes in the financial position of the pension plan. This allows fiduciaries and sponsors to understand plan performance and set risk budgets in an asset-liability framework rather than an asset-only framework. We are increasingly seeing this framework being adopted,” said Mr. Hartshorn.

“As companies set budgets and business plans for 2010, the potential impact of the 2008 investment performance will continue to be important. Under US pension accounting rules (FAS 87) and US funding rules (set out in the Pension Protection Act), the effect of reductions in funded status on earnings and cash contributions can be smoothed or deferred. In the absence of a sharp recovery in the pension plan funded status before the end of the year, many companies could be facing higher pension costs under FAS 87 and higher cash contribution requirements in 2010 compared to 2009,” said Mr. Hartshorn.

“Additionally, the smoothing and deferral mechanisms permitted under FAS and PPA can cause a disconnect between pension plan accounting, pension plan funding and what is really happening to the pension plan.  In particular, an underfunded pension plan will need additional funding from future cash flows of the business either now or in the future, leaving less available for capital investment and dividend payments to shareholders. Additionally, for plans where assets are held predominantly in equities, resulting in an asset-liability mismatch, the pension plan risks are greater, which should result in a higher cost of capital. These are all factors that companies need to consider when making asset allocation decisions and setting company budgets,” 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 $1.17 trillion, compared with the estimated value of the liabilities of $1.45 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, August 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.

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