While flat equity markets and interest rates did not affect funded ratios during the month, Mercer made adjustments based upon actual funded status released in filings for the 2013 year end. The collective deficit of $332 billion as of March 31, 2014, is up $56 billion from the estimated deficit of $276 billion as of February 28, 2014, according to Mercer’s analysis.
Global equity markets were mostly flat during March with losses outside the U.S. offsetting modest domestic gains of 0.7%, based on the S&P 500 Index. The Mercer Yield Curve discount rate for mature pension plans was up only 2 basis points to 4.28% during the month, leaving liabilities mostly unchanged.
Mercer estimates these factors would have left funded status level during March. However, information released in year-end financial statements showed a slightly lower actual funded status than previously estimated. The new data that was released by most of the S&P 1500 plan sponsors with December 31 fiscal year-end measurement dates decreased the aggregate funded ratio by approximately 2%.
The newly reported numbers indicate asset values were slightly lower than previous estimates, confirming the move towards higher fixed income allocations during 2013 as many plan sponsors made asset allocation changes to lock in gains from their equity returns, a trend that Mercer expects to continue in 2014. In addition, liabilities were somewhat higher than estimated, as some plan sponsors have already adopted more conservative assumptions regarding the longevity of participants, resulting in increased plan liabilities.
“This month is a reminder of the various factors that can affect the funded status of pension plans,” says Jim Ritchie, a principal in Mercer’s retirement business, based in New York. “We are starting to see the potential impact of new mortality standards on plan sponsor’s balance sheets. This is creating an increased interest from plan sponsors in risk transfer strategies, such as annuity purchases or lump sum cashouts in 2014. The first quarter of 2014 has reminded us how quickly the funded status of a pension plan can change, creating the need for a well-developed dynamic investment policy and overall risk strategy to take advantages of opportune market conditions.”
Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to March 31, 2014, in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all nondomestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2013, was $1.85 trillion, compared with estimated aggregate liabilities of $1.96 trillion.
Allowing for changes in financial markets through March 31, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of February the estimated aggregate assets were $1.83 trillion, compared with the estimated aggregate liabilities of $2.16 trillion.
Information about the Mercer Yield Curve can be found here.