Pension deficits are on the rise among S&P 1500 companies, according to new figures from Mercer. According to the firm, the combined deficits of pensions sponsored by companies in the S&P 1500 increased by $134 billion in September 2011—from an overall deficit of $378 billion as of Aug. 31, 2011, to $512 billion at the end of September. This deficit corresponds to an aggregate funded ratio of 72% as of Sept. 30, compared to a funded ratio of 79% at Aug. 31, 2011 and 81% at Dec. 31, 2010.
According to Mercer, these funding levels are at a post-World War II low. The company says the previous low point for funding was Aug. 31, 2010, when the aggregate funded ratio was 71% but the deficit at that point of $507 billion has grown as liabilities have increased.
Mercer attributes the decline in funded status to a 7% drop in equities, and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical U.S. pension plan decreased approximately 30-40 basis points during the month. Mercer’s analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 16% decline.
“The end of September marks the largest deficit since we have been tracking this information,” says Jonathan Barry, a partner in Mercer’s retirement risk and finance business. “Over the past three months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with Sept. 30 fiscal and/or plan year-ends.
“The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives,” says Kevin Armant, a principal with Mercer’s financial strategy group. “Those that were aware of the risks and can deal with the increased cash funding and P&L charges associated with the current market downturn may choose to stay the course. Those that can’t will continue to evaluate risk reduction opportunities, including increasing interest rate hedging programs, moving more into long corporate bond allocations or transferring risk through the introduction of a lump sum payment option or purchasing annuities. For both types of organizations, it’s likely that additional cash funding will be required and it may be useful to look at the option of accelerating those contributions, as some sponsors may have the capacity to take advantage of the low interest rate environment by borrowing to fund.”