This deficit corresponds to an aggregate funded ratio of 79% as of April 30, 2012, compared to a funded ratio of 82% as of March 31, 2012, but the funded ratio is still up from 75% at December 31, 2011.
The decrease in funded status in April was attributable to an increase in liabilities due to declining interest rates. Interest rates on high quality corporate bonds, which are used to measure the pension liability, fell 22 to 32 basis points during the month, as measured by the Mercer Pension Discount Yield Curve. Assets were relatively flat during the month as U.S. equity markets were down about 0.6%, offset by positive returns for fixed income investments.
“After three straight months of improvements in funded status, April saw a bit of a step back for U.S. pension plans,” said Jonathan Barry, a partner in Mercer’ Retirement Risk and Finance business. “It’s an important reminder to plan sponsors that these plans can go down just as quickly as they went up.”
Mercer sees a continued interest in plan sponsors moving towards risk management strategies to help reduce the funded status volatility that is inherent in most U.S. pension plans. “We are seeing sponsors continue to explore various risk management strategies in 2012, from higher fixed income allocations to cashouts for former employees,” said Barry. “For the past few years, many sponsors have been slow to act on some of these strategies, as there was an expectation that interest rates would rise, but perhaps we are seeing sponsors come to grips with a potential prolonged period of low rates.”
Mercer estimates the aggregate combined funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2011, was $1.45 trillion, compared with estimated aggregate liabilities of $1.93 trillion. Allowing for changes in financial markets though the end of April 2012, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.56 trillion, compared with the estimated aggregate liabilities of $1.94 trillion as of April 30, 2012.