Bond Yields Save Largest Pensions from Funding Decline

March 5, 2009 ( - The funded status of the pension plans of S&P 1500 companies held steady in February despite further falls in the value of equities in February, according to the latest estimates by Mercer.

A Mercer press release said the aggregate deficit of pension plans sponsored by S&P 1500 companies was $373 billion, virtually unchanged from $380 billion at the end of January and down from $409 billion at the end of December 2008. The aggregate funded status fell to 74% at the end of February down slightly from 75% at the end of January as well as December (see Funded Status of Pensions Unchanged Since December ).

“Through February, although equity markets declined (the S&P 500 index was down 9%) reducing the value of plan assets, bond yields increased which also reduced the value of plan liabilities. The net result was virtually no change in funded status, the difference in the value of plan assets and the value of plan obligations,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, in the press release.

Using information reported in company financial statements for 2007, the total value of pension plan assets at December 31, 2007, was $1.66 trillion, compared to the total value of the liabilities of $1.60 trillion. At December 31, 2008, the estimated assets had declined to $1.21 trillion, compared with an estimated liability value of $1.62 trillion (see Mercer: U.S. Pension Funding Suffers ‘Alarming Deterioration’ ). For 2009 year-to-date (up to the end of February), the estimated assets were $1.06 trillion, compared with the estimated value of the liabilities of $1.44 trillion.

“The focus for most plan sponsors in the coming months will be to take advantage of some of the short term opportunities available to manage their pension plans, for example in selecting Pension Protection Act (PPA) assumptions or through investment opportunities that may exist in the current market. At the same time, plan sponsors are seeking ways to address the significant deficits that now exist. Plan sponsors need to take this action over the coming months if it is going to make a difference to the 2009 year-end financial statements and the 2010 pension expense and contribution,” Hartshorn said.