The funded status of U.S. pension plans is being chipped away by falling yields on corporate bonds and rising yields on Treasuries, according to Mercer.
Mercer’s analysis finds that the funded status of plans sponsored by S&P 1500 companies deteriorated by US$78 billion from the end of April, bringing the estimated aggregate deficit to $245 billion at the end of June, up from $167 billion at the end of April. The aggregate funded status was 82% at the end of June, down from 87% at the end of April. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75%.
“After peaking at around 7¾ per cent at the end of April, the yield implied by the Mercer Discount Yield Curve has fallen to slightly more than 6¾ per cent at the end of June,” says Adrian Hartshorn, a member of Mercer’s Financial Strategy Group. “This change adds between 10% and 15% to the value of the liabilities for a typical plan.”
Hartshorn believes that plan sponsors are going to face some tough decisions over the coming months with companies seeking to balance the demands of investing for the economic recovery and maintaining sufficient working capital to meet short-term expenditure.
“The inherent uncertainty in the pension costs — both cash cost and pension expense — is particularly unwelcome,” he says.
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