August Markets Leave Pension Plan Funding Unchanged

September 8, 2009 ( - The equity markets may have been rosier during August, but that did not translate into an improved funded status for pension plans of S&P 1500 companies, Mercer said.

In its latest analysis, Mercer said the declining yield on high quality corporate bonds is causing a hike in the value of pension plan liabilities, which has offset the growth in equity values.

According to the Mercer news release, the estimated August aggregate deficit was $278 billion compared with $279 billion at the end of July (see  Funded Status of Pension Plans Falls for Third Month ). The aggregate funded status was 81% at the end of August, unchanged from a month earlier. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75%.

“During August the total return on U.S. equities was 3.6%, which helped boost the value of assets in pension plans sponsored by S&P 1500 companies by 2.4%,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, in the news release. “However, the value of plan liabilities, which are affected by the yield on high-quality corporate debt, increased by 1.9%. Allowing for the end-of-July deficit, the net impact was to leave the funded status of pension plans sponsored by S&P 1500 companies unchanged.”

Hartshorn asserted that measuring asset return relative to liabilities and funded status provides sponsors with a more informative perspective on the changes in the financial position of the pension plan and the impact on their business.

“Regular monitoring of the funded status, together with the necessary knowledge of the market environment and good governance around decision making, allows plan sponsors and fiduciaries to take advantage of the dynamic risk management opportunities available to them. A well-developed monitoring and governance framework drawing upon sound actuarial and investment expertise can help ensure that companies achieve their financial objectives for their plans,” said Hartshorn.