Despite a generally favorable economic environment for pensions in February, Mercer’s estimated funding levels of pension plans sponsored by S&P 1500 companies fell 2% in February to 87%, primarily due to adjustments based upon information released in year-end financial statements. The collective deficit of $276 billion as of February 28, 2014, is up $43 billion from the estimated deficit of $232 billion as of January 31, 2014, according to Mercer.
Equity markets rebounded in February posting returns in excess of 4% during the month, based on the S&P 500 index. The Mercer Yield Curve discount rate for mature pension plans dropped seven basis points during the month leading to an increase in liabilities that offset the asset gains.
All things being equal, Mercer estimates that these factors would have increased funded status by approximately 1% in February. However, mitigating the positive returns was information released in year-end financial statements which showed a slightly worse funded status than previously estimated. The new data that was released by approximately one quarter of the S&P plan sponsors covering roughly half of the total pension obligations for these plans, reduced the aggregate funded ratio by approximately 3%, for a net decrease in the month of 2%
The newly reported numbers indicate that asset values were slightly lower than previous estimates as a result of a broad market trend toward higher fixed income allocations that occurred throughout 2013 as many plan sponsors locked in gains from their equity returns. In addition, liabilities were somewhat higher than estimated, as many plan sponsors have begun to adopt more conservative assumptions regarding how long pensioners live, resulting in increased liabilities.
“Early indications from 10-K filings are that plan sponsors made some significant steps towards risk management in 2013,” said Jonathan Barry, a partner in Mercer’s retirement business. “We are also seeing the first glimpse of the potential impact of new mortality standards on plan sponsor’s balance sheets. Some sponsors have begun to get out in front of potentially large increases that we anticipate will begin to impact pension liabilities over the next year or two. We are seeing increased interest from plan sponsors in risk transfer strategies, such as annuity purchases or lump sum cashouts in 2014, as a way of further managing the many risks to which these plans are exposed.”
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 February 28, 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 $1.85 trillion, compared with estimated aggregate liabilities of $1.96 trillion. Allowing for changes in financial markets through February 28, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of February the estimated aggregate assets were $1.86 trillion, compared with the estimated aggregate liabilities of $2.13 trillion.
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
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.