Mercer Finds U.S. Pension Funded Status Declined in 2010

January 5, 2011 ( - The deficit in pension plans sponsored by S&P 1500 companies increased by $86 billion in 2010, from a deficit of approximately $229 billion as of December 31, 2009, to $315 billion as of December 31, 2010, according to new figures from Mercer.

This deficit corresponds to a funded status of 81% as of December 31, 2010, compared to a funded status of 84% on December 31, 2009.  

In a news release, Mercer noted that the funded status of these plans could have been worse, were it not for positive experience over the past four months of the year.  In particular, December saw funded status improve by approximately $44 billion due primarily to positive equity returns.  

For many companies, the larger deficit will drive higher P&L expense, as well as potentially significant increases in pension funding requirements,for 2011, as funding rules generally require sponsors to make up new deficits over seven years, Mercer said. 

Equity markets returned close to 7% during December continuing their strong rebound for the second half of 2010. While the S&P 500 index returned 13% for the year, it has earned 22% since June 30, after falling 8% in the first half of the year. The strong returns combined with rising interest rates helped pension plan funded ratios rise close to levels seen at the beginning of the year.   

“Dynamic asset allocation approaches that systematically reduce volatility as funded status improves are now commonplace.  Many plan sponsors are engaged in detailed planning around the logistics of making lump-sum cashouts available in 2012 as a means of reducing liabilities and we continue to see a lot of interest in exploring insurer buy-outs as a means of eliminating liabilities.  If funded status continues to improve either through equity market performance or rising bond yields, 2011 could see a marked acceleration in the shift away from equities into bonds for corporate pension plans,said Kevin Armant, a principal with Mercer’s Financial Strategy Group, in the announcement.