Funding levels of pension plans sponsored by S&P 1500 companies improved during the month of September, with a funded ratio (assets divided by liabilities) of 91% at the end of the month, the highest level seen since October 2008. This funded ratio corresponds to a deficit of $182 billion as of September 30, 2013, according to Mercer, down significantly from the estimated deficit of $557B as of December 31, 2012.
Despite volatility amidst concerns about a government shutdown, equity markets saw gains during the month with the S&P 500 index increasing 3.0%. Yields on high grade corporate bond rates (which are used to measure liabilities) spiked during the month, but subsequently fell after the Federal Reserve gave indications that it would continue its bond purchasing program. The month ended with bond yields slightly lower than the end of August, with the Mercer Yield Curve discount rate for mature pension plans falling from 4.63% to 4.58%, but still up 87 basis points year-to-date. Also of note is Mercer’s estimate that 20% of plans sponsored by S&P 1500 companies are now over 100% funded, up dramatically from only 4% at the end of 2012.
“It’s been a long road – nearly five years – for plan sponsors to get back over a 90% funded status”, said Jonathan Barry, a Partner in Mercer’s Retirement business. “Furthermore, these plans have recovered over $500B from the deficit level in just over a year, from a deficit high water mark of $689B at the end of July 2012. This demonstrates the level of volatility to which these plans are potentially exposed.“
“With this rapid improvement also comes the opportunity for sponsors to take some of the pension plan risk off the table, through changes in investment policy, risk transfer strategies, or a combination of both.”, added Richard McEvoy, a Partner in Mercer’s Investments business. “The key is to have a plan in place, to capitalize on the improvement. We have seen too many times where these high funded ratios decline quickly due to market events and plan sponsors lose out on the funded status gains.”
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 and by projections to September 30, 2013 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, 2012, was $1.59 trillion, compared with estimated aggregate liabilities of $2.14 trillion. Allowing for changes in financial markets through September 30, 2013, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of September the estimated aggregate assets were $1.77 trillion, compared with the estimated aggregate liabilities of $1.95 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 http://www.mercer.com/pensiondiscount.
The Mercer US Pension Buyout Index may be accessed at www.mercer.com/US-pension-buyout-index
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 20,000 employees are based in more than 40 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 53,000 employees worldwide and annual revenue exceeding $10 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.