S&P 1500 pension funded status drops 5% in January

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S&P 1500 pension funded status drops 5% in January as interest rates continue to fall

  • February 4, 2015
  • United States, New York

·         Deficits increased by $150 billion in January to $654 billion, reaching highest levels since 2012

·         The funding level of 74% is the lowest since 2012, completely wiping out the gains from 2013

·         Interest rates decreased by 48 basis points, the largest monthly interest rate drop in three years

·         The S&P 500 index experienced a 3.1% loss in January

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased from 79% as of December 31, 2014 to 74% as of January 31, 2015. Sharp decreases in interest rates used to calculate corporate pension plan liabilities, coupled with losses in equity markets, brought funded status down by 5%. Gains in the fixed income market were not enough to offset increases in liabilities. The estimated aggregate deficit of $654 billion as of January 31, 2015 increased $150 billion from $504 billion at the end of 2014, according to Mercer.[1]

The S&P 500 price index decreased by 3.1% in January, while MSCI EAFE index increased by 0.4%. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 48 basis points to 3.33%.

“Not the start to the year that plan sponsors were hoping to see”, said Jim Ritchie, a principal in Mercer’s Retirement Business.  “After a 9% drop on average in 2014, sponsors are hit with a further 5% drop right out of the gate in 2015. The continued volatility in fixed income and equity markets, as well as the expected improvements in mortality, together make risk transfers a more attractive strategy in 2015. While many plan sponsors settled their liabilities with former vested employees in 2014, more will likely consider settling their liabilities with active employees and retirees in 2015. There is an unprecedented opportunity in 2015 for many plan sponsors to terminate their pension plans at a discount to accounting liabilities.”

Mercer estimates the aggregate funded status position of plans sponsored by S&P 1500 companies on a monthly basis. Figure 1 (next page) shows the estimated aggregate surplus/(deficit) position and the funded status of all plans sponsored by companies in the S&P 1500. The estimates are based on each company’s year-end statement[2] and by projections to January 31, 2015 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, 2014, was $1.89 trillion, compared with estimated aggregate liabilities of $2.39 trillion. Allowing for changes in financial markets through January 31, 2015, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of January the estimated aggregate assets were $1.90 trillion, compared with the estimated aggregate liabilities of $2.55 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 : Estimated aggregate surplus/(deficit) position and the funded status of all plans sponsored by companies in the S&P 1500

 

 

Source: Mercer, January 2015

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

December 31, 2014

3.81%

2,058.90

January 31, 2015

3.33%

1,994.99

 

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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