Corporate Bond Dip Hits Pension Funding

September 22, 2010 ( – Accounting measures of the liabilities of defined benefit (DB) pension plans in most developed economies have seen marked liability increases sparked by declining corporate bond yields, Mercer says.

A Mercer news release said this is likely to result in larger deficits at company year-ends combined with equity market performance experienced over 2010.

According to Mercer, bond yields have fallen by over a quarter in some markets. In the U.S., for example, since the end of June 2008, AA corporate bond yields fell from 6.97% to just under 5% at the end of August 2010.

“A 50-basis points fall in discount rates roughly results in a 10% increase in liabilities for a pension plan,” said Frank Oldham, Mercer’s global head of Pension Risk Consulting, in the news release. “As a result, measures of pension liabilities have increased faster than the value of the assets held across numerous markets. The result is even larger deficits on company balance sheets.”

Market Analysis  

Research by Mercer consultants shows that pension deficits in most local markets are likely to have increased to record levels:

United States 

In the U.S., there remains concern over the level of AA corporate bond yields, which have been steadily declining in 2010, reaching 4.94% (for a mature plan) as of the end of August 2010, the lowest yield in a decade. Both U.S. and international accounting standards require pension plan liabilities to be valued using AA corporate bond yields, and these lower yields translate into higher plan liabilities.

United Kingdom 

In both the U.S. and the U.K., nominal corporate bond yields declined in the second half of 2009 and have continued to fall throughout 2010. In the U.K., benefits are linked to inflation, so liabilities have been more stable over the year, but they still sit at historically high levels. According to Mercer’s latest data, the aggregate FTSE 350 IAS19 pension deficit stood at about £85 billion at June 30, the same level as the previous quarter; £15 billion was added to liabilities due to falling bond yields.


Canada’s economy was less affected by the crisis in financial markets, but Canadian companies are also experiencing record deficits. The story in Canada is more nuanced, with poor investment performance hobbled by flat markets in the first half of 2010, combined with declining AA corporate bond yields driving up liabilities. As a result, pension deficits overall are expected to more than double, from about C$20 billion to just under C$50 billion.


German accounting rules currently differ from those adopted in most other countries, permitting companies to average bond yields over seven years, so the impact can appear more muted. Even so, unless market conditions improve, liabilities reported at the end of the year are expected to reach their highest levels yet. According to Mercer, the €220 billion liabilities of the 30 DAX companies could increase by €33 billion upon each 1% decrease in the discount rate. Ultimately, further effects will emerge as accounting standards are harmonized internationally.


In the Netherlands, pension accounting liabilities are based on AA corporate bond yields drawn from the wider European Monetary Union (EMU) market, where there has been a significant fall. The total IAS19 deficit of the pension schemes of the 48 companies included in the AEX and AMX had, at the end of August 2010, increased to €59 billion from €24 billion in December 2009. As in other countries, some pension funds in the Netherlands have been matching their assets to their liabilities in order to manage the risk in this area.


Like the Netherlands, pension accounting liabilities in Ireland are based on bond yields drawn from the wider EMU market, where yields have fallen to around 4.5%, down from 6% at the beginning of 2010. As of December 31, 2009, ISEQ companies had accumulated assets of around €13.4 billion and liabilities of around €17.8 billion, giving a cumulative pension deficit of €4.4 billion. Mercer estimates that as of August 31, 2010, these companies would have assets of the order of €14 billion and combined defined benefit obligations of €21.9 billion, giving a deficit of €7.9 billion.