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United States
New York, 8 September 2009

Despite the continued recovery in equity markets, the funded status of pension plans sponsored by S&P 1500 companies did not improve during August, according to the latest estimates by Mercer. The declining yield on ”high quality” corporate bonds is causing an increase in the value of pension plan liabilities, which has offset the growth in equity values.

According to the Mercer analysis, the funded status of pension plans sponsored by S&P 1500 companies remained broadly unchanged during the month of August. The estimated aggregate deficit at the end of August was $278 billion compared with $279 billion at the end of July. The aggregate funded status was 81 percent at the end of August, unchanged from the position at the end of July. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75 percent.

“During August the total return on US equities was 3.6 percent, which helped boost the value of assets in pension plans sponsored by S&P 1500 companies by 2.4 percent (not all pension plan asset are invested in US equities). However, the value of plan liabilities, which are affected by the yield on high-quality corporate debt, increased by 1.9 percent. Allowing for the end-of-July deficit the net impact was to leave the funded status of pension plans sponsored by S&P 1500 companies unchanged,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, which helps companies manage financial risk in their retirement programs.

“Measuring asset-only returns does not provide plan sponsors with an accurate picture of their pension plans. Take the five-month period from March 31, 2009, to August 31, 2009, for example. There has been a positive equity return in each month, with a total return on US equities of 29.2 percent, resulting in an increase in the aggregate value of S&P 1500 plan assets of just over 21 percent. However, over the same period the corresponding liabilities have grown by over 24 percent, so that the funded status (the ratio of assets to liabilities) has declined. Measuring asset return relative to liabilities and funded status provides sponsors with a more informative perspective on the changes in the financial position of the pension plan and the impact on their business – contribution requirements and pension expense, for example,” said Mr. Hartshorn.

“Regular monitoring of the funded status, together with the necessary knowledge of the market environment and good governance around decision making, allows plan sponsors and fiduciaries to take advantage of the dynamic risk management opportunities available to them. A well-developed monitoring and governance framework drawing upon sound actuarial and investment expertise can help ensure that companies achieve their financial objectives for their plans,” 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 $1.20 trillion, compared with the estimated value of the liabilities of $1.48 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. Access information on the Mercer Yield Curve.

Figure 1

Source: Mercer, 1 September 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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