Mercer: U.S. Pension Funding Suffers 'Alarming Deterioration'

January 6, 2009 ( -The funding status of the largest U.S. companies' pension plans, which Mercer said has suffered an "alarming deterioration," plummeted from a 104% surplus at year-end 2007 to a 75% funded level a year later, according to Mercer's latest estimate.

The change, Mercer noted in a news release, “will negatively impact corporate earnings in 2009.”

Stated in dollar terms, Mercer said the plans went from an aggregate surplus of $60 billion at the end of 2007 to an estimated aggregate deficit of $409 billion at the end of 2008 – an estimated aggregate loss of $469 billion. The news release said the aggregate funded status fell by $129 billion in December, $130 billion in November and $110 billion in October, while the aggregate deficit for the first nine months of 2008 was $100 billion.

The study also shows that pension expense is likely to increase from $10 billion in 2008 to an estimated $70 billion in 2009.

“The decline in funded status will be capitalized and reflected in corporate balance sheets for many companies. This will reduce balance sheet strength, which leads to consequences for several areas of the business, including capital expenditure decisions, loan covenants and credit rating decisions,” said Adrian Hartshorn, a member of Mercer’s Financial Strategy Group, in the news release.

Adverse Equity, Bond Markets

According to Mercer, the decline in pension plan funding levels comes from adverse trends in both equity and bond markets. The S&P 500 index was down almost 40% through 2008, a decline typical of nearly all of the world’s major equity indexes. In the bond markets, 10-year Treasury yields have fallen from 4.1% to 2.3%, and AA bond yields were at 6.1%, practically unchanged from the start of the year.

Declining equity markets have been the main driver behind asset losses for the pension plans sponsored by S&P 1500 companies. Although rising corporate bond yields benefited pension plans through much of 2008 by reducing the value placed on plan liabilities, a rapid reduction in yields in the fourth quarter, particularly in the last few weeks of December, has largely eliminated this gain, Mercer said.

The total value of pension plan assets at December 31, 2007, was $1.66 trillion, compared to the total value of the liabilities of $1.6 trillion. At December 31, 2008, the estimated assets had declined to $1.21 trillion, compared with estimated liabilities of $1.62 trillion.