S&P 1500 Pension Deficit Shows Modest Improvement in June

S&P 1500 Pension Deficit Shows Modest Improvement in June

S&P 1500 pension deficit shows modest improvement in June

  • 07 July 2014
  • United States, New York City

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies rose one percent in the month of June to end the second quarter with a funded ratio of  85%. Small gains in equity markets accompanied by increases in interest rates used to calculate corporate pension plan liabilities drove the improvement in funded status. While the collective estimated deficit of $330 billion as of June 30, 2014, was down $13 billion from the estimated deficit of $343 billion as of May 31, 2014, it has increased by $94 billion from the deficit of $236 billion seen at the beginning of the year according to Mercer.  This translates into a year to date decline in funded status of approximately 3%.[1]

US equity markets earned about 1.9% during June based on the S&P 500 index. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by one basis point to 4.07%, a slight improvement since last month’s low point which drove liabilities downward.

“Even with the very positive returns we have seen in most equity markets this year, overall, US corporate pension plans have lost ground since the beginning of the year due to a 50-60 basis point drop in discount rates.” said Jonathan Barry, a partner in Mercer’s Retirement business.  “Since the market downturn in 2008 we have seen a number of chances to lock in funded status gains, but many plan sponsors missed out on those chances.   Now we are seeing a big uptick in the number of sponsors looking to manage this volatility and avoid the ups and downs of the market.   In particular, 2014 and 2015 look to be big years for sponsors to execute on cashout programs for former employees, which can serve to shrink the size of the plan and lower various costs associated with managing pension programs.”    

Mercer estimates the aggregate 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. The estimates are based on each company’s year-end statement[2] and by projections to June 30, 2014 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 as of December 31, 2013, was $1.80 trillion, compared with estimated aggregate liabilities of $2.03 trillion. Allowing for changes in financial markets through June 30, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of June the estimated aggregate assets were $1.88 trillion, compared with the estimated aggregate liabilities of $2.21 trillion. Figure 2 shows the interest rates used in Mercer’s pension funding calculation.

Notes for editors

Information on the Mercer Yield Curve is available at http://www.mercer.com/pensiondiscount.

The Mercer US Pension Buyout Index may be accessed at www.mercer.com/US-pension-buyout-index.

About Mercer

Mercer is a global consulting leader in talent, health, retirement and investments. Mercer helps clients around the world advance the health, wealth and performance of their most vital asset – their people. Mercer’s more than 20,000 employees are based in 43 countries and the firm operates in over 140 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 55,000 employees worldwide and annual revenue exceeding $12 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. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights.

Unless otherwise stated, the calculations are based on the Financial Accounting Standard (FAS) funding position and include analysis of the S&P 1500 companies.

[1] Figures provided by Mercer Investment Consulting, Inc. Funded status figures from 12/31/2013 onwards have been revised to reflect updated Form 10-K data.

[2] Source of financial statement data: Standard & Poor’s Capital IQ. Standard and Poor’s is a division of The McGraw-Hill Companies, Inc. This may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s.  Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party.  Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content.  THIRD PARTY CONTENT PROVIDERS GIVE NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. THIRD PARTY CONTENT PROVIDERS shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of THEIR CONTENT, INCLUDING ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase, hold, or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice.

Source: Mercer, June 2014

Funded status figures from 12/31/2013 through 4/30/2013 have been revised to reflect updated 10-K data as of 5/31/2014.

[3] Assumed duration of approximately 12 years. Based on Mercer Yield Curve Mature Plan Index rate.

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