Corporate Pension Deficits in January Highest Since 2012

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, according to Mercer.

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 increased $150 billion from $504 billion at the end of 2014—reaching the highest level since 2012, Mercer says.

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,” says 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.”

According to Mercer, 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.