S&P 1500 pension deficits remain unchanged in October

S&P 1500 pension deficits remain unchanged in October

S&P 1500 pension deficits remain unchanged in October

  • November 5, 2014
  • United States, New York

·         Funded status stayed constant at 84% as decreases in interest rates offset strong gains in the equity markets

·         Deficits increased modestly by $15 billion over the month to levels last seen in August

·         Interest rates decreased approximately 12 basis points from last month

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies stayed at 84% at the end of October 2014. Decreases in interest rates used to calculate corporate pension plan liabilities offset rising equity markets, keeping funded status constant. The collective estimated deficit of $367 billion as of October 31, 2014, is up modestly by $15 billion from the estimated deficit of $352 billion as of September 30, 2014, and up $131 billion from the beginning of the year according to Mercer.[1]

The S&P 500 index increased by 2.3% during October. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 12 basis points to 3.98%, driving liabilities upward, and wiping out positive plan asset performance.

“Even though slight decreases in interest rates this year have eliminated gains from a relatively strong year for equity markets, keeping funded status level this year, there have been some significant events over the past month that warrant plan sponsors to consider a change in their pension risk strategies for 2015,” said Jim Ritchie, a principal in Mercer’s retirement practice. 

“With the announcement from the Fed that it will end its quantitative easing program and the Society of Actuaries’ release of its new mortality tables, plan sponsors will want to be ready to take advantage of favorable economics that could provide significant savings in 2015,” noted Mr. Ritchie.  “Should interest rates  rise in 2015, the effect would be to make annuity purchases and LDI strategies attractive in 2015.  Those plan sponsors who have not executed term-vested cashouts in 2014 can still see significant savings in 2015 before the new mortality tables become effective for funding and lump sum determinations.”

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 October 31, 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 October 31, 2014, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of October the estimated aggregate assets were $1.88 trillion, compared with the estimated aggregate liabilities of $2.24 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.

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

Figure 1

Source: Mercer, October 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.

See Figure 2 for High Quality Corporate Bond Yield and S&P 500 data points.

Figure 2: Sample Data Points:

Date

High Quality Corporate Bond Yield[3]

S&P 500 Index[4]

December 31, 2007

6.40%

1,468.36

June 30, 2008

6.97%

1,280.00

December 31, 2008

6.34%

903.25

June 30, 2009

6.79%

919.32

December 31, 2009

5.98%

1,115.10

June 30, 2010

5.33%

1,030.71

December 31, 2010

5.33%

1,257.64

June 30, 2011

5.40%

1,320.64

December 31, 2011

4.55%

1,257.60

June 30, 2012

3.87%

1,362.16

December 31, 2012

3.71%

1,426.19

June 30, 2013

4.49%

1,606.28

December 31, 2013

4.69%

`1,848.36

June 30, 2014

4.07%

1,960.23

September 30, 2014

4.10%

1,972.29

October 31, 2014

3.98%

2,018.05

 

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

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

[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.

 

 

 

 

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