A Mercer press release said the funded status of pension plans sponsored by S&P 1500 companies dropped by $34 billion during the month of July, bringing the estimated aggregate deficit to $279 billion, up from $245 billion at the end of June (see June Sees Growing DB Funding Shortfall ). The aggregate funded status was 81%, down from 82%.
Although equity values are increasing, so is the value of plan liabilities due to the falling yields on corporate bonds. Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, said in the press release that equities returned 7.4% in July increasing the estimated aggregate value of pension plans by 6.2%; however, falling yields on AA corporate bonds resulted in liabilities values for the same plans increasing by 7.6%.
“Companies should focus attention on the return relative to liabilities, which was negative 1.3%,” said Hartshorn.
“We believe that measuring asset return relative to liabilities provides sponsors with a more informative perspective on the changes in the financial position of the pension plan. This allows fiduciaries and sponsors to understand plan performance and set risk budgets in an asset-liability framework rather than an asset-only framework. We are increasingly seeing this framework being adopted,” he added.
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