Corporate Pension Deficits Widen again in 2011

January 4, 2012 ( - The aggregate deficit in pension plans sponsored by S&P 1500 companies reached $484 billion at December 31, 2011, an increase of $169 billion from year-end 2010, according to new figures from Mercer.

This deficit corresponds to an aggregate funded ratio of 75% as of December 31, 2011 compared to a funded ratio of 81% at December 31, 2010.   

The decrease in funded status in 2011 was primarily attributable to the increase in liabilities resulting from a decrease in discount rates during the year, Mercer said.  On the asset side, U.S. equity markets were up approximately 1% for the year, and there were strong returns on U.S. fixed income, with double digit returns for long maturity bonds. However, with less than 45% of pension plan assets generally invested in fixed income and often in shorter maturity bonds, these positive returns only had a small impact on overall funded status.  

“With U.S. and non-U.S. equity indices underperforming expectations and interest rates on high-quality corporate bonds declining upwards of 100 basis points, driving discount rates down and plan liabilities up significantly, we saw a marked decline in funded status.” said Jonathan Barry, a partner with Mercer’s Retirement Risk and Finance consulting group. “We also saw wide fluctuations in funded status through the year – with the aggregate funded status peaking at about 88% at the end of April, and hitting a low of 71% at the end of September – the largest month-end deficit we have ever seen since we began tracking this information.”   

According to Mercer, the funded status deficit would have been worse if not for the estimated $50 billion that companies disclosed they expected to contribute during 2011. “Many plan sponsors are merely treading water, or even moving backwards on funded status, despite significant cash contributions to their plans.” said Barry. “For many companies, the larger deficit will drive higher P&L expense, as well as large increases in pension funding requirements for 2012.”