Mercer Says Corporate Pensions Hampered By Rates in July

It’s been something of a common monthly performance story for pension plans in recent years, with decreasing rates overpowering increasing markets.

Pension plans sponsored by companies in the S&P 1500 saw a 1% drop in funded status during July, due to a dip in interest rates used to discount future liabilities according to Mercer. 

This left the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies at 83% as of July 31. Mercer measures the aggregate deficit among S&P 1500 pension plans at around $379 billion—up $33 billion from the end of June. It’s not all bad news for corporate pension plans, though, with current funding levels up about $125 billion from the $504 billion deficit measured at the end of 2014.

Researchers note the S&P 500 index and the MSCI EAFE index each gained 2.0% in July, giving decent returns to the typical pension plan portfolio. But at the same time, according to Mercer, the typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 17 basis points to 4.11 percent.

Jonathan Barry, a Partner in Mercer’s Retirement business, says the solid market returns seen in July “were more than offset by the decrease in discount rates over the month.” The movements highlight just how sensitive these plans are to interest rate action, he adds.

Barry also suggests upwards of 80% of plan sponsors are either currently employing or considering dynamic de-risking approaches, while roughly three out of four of plan sponsors will have executed lump sum transfers by the end of 2016. As a consultant to pension plan sponsors and a provider of industry research, Mercer says it is seeing an increased demand for risk-reducing strategies aimed at limiting funded status volatility. 

“Furthermore, there is increasing interest in annuitization options,” Barry concludes, “with over one-third of sponsors likely or very likely to embark in a transaction in the next two years.”