June Sees Growing DB Funding Shortfall

July 8, 2009 (PLANSPONSOR.com) - After several months of record high credit spreads, falling yields on corporate bonds and rising yields on Treasuries are having a negative impact on the funded status of pension plans, according to the latest Mercer estimates.

A Mercer news release says the funded status of plans at S&P 1500 companies deteriorated by $78 billion from the end of April, bringing the estimated aggregate deficit to $245 billion at the end of June, up from $167 billion at the end of April.

The aggregate funded status was 82% at the end of June, down from 87% at the end of April. The 2008 year-end deficit was $409 billion, equivalent to a funded status of 75%.

The estimated total value of pension plan assets at December 31, 2008, was $1.21 trillion, compared with estimated liabilities of $1.62 trillion. Allowing for changes in financial markets in 2009 year-to-date, the estimated assets were $1.10 trillion, compared with the estimated value of the liabilities of $1.35 trillion, Mercer said.

“After peaking at around 7¾% at the end of April, the yield implied by the Mercer Discount Yield Curve has fallen to slightly more than 6¾% at the end of June. This change adds between 10% and 15% to the value of the liabilities for a typical plan,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, in the news release.

The decline in funded status comes despite a continued improvement in equity markets (during May and June, the S&P 500 total return index was up 5.8%). The improvement in equity values was more than offset by declining Treasury values and an increase in liabilities caused by declining corporate bond yields. The net result was a decline in funded status (the difference in the value of plan assets and the value of plan obligations).

More information is at http://www.mercer.com/pensiondiscount .