Outlook Bleak for Pension Plan Expense and Contributions

December 5, 2011 (PLANSPONSOR.com) - The aggregate deficit in pension plans sponsored by S&P 1500 companies decreased by $80 billion during November, from a deficit of approximately $471 billion as of October 31, 2011, to $391 billion as of November 30, 2011, according to new figures from Mercer.

This deficit corresponds to an aggregate funded ratio of 78% as of November 30, 2011, compared to a funded ratio of 75% at October 31, 2011 and 81% at December 31, 2010.   

Mercer said the increase in funded status was driven by an increase in yields on high quality corporate bonds during November. Equity markets ended the month strong despite earlier losses, resulting in a final loss for the month of only 0.2%. Discount rates for the typical U.S. pension plan increased approximately 40 basis points during the month. Mercer’s analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and had fallen below 70% in early October, before rebounding the past two months.   

“Even though discount rates moved somewhat higher during November, they are likely to be in excess of 40 basis points lower at the end of this year than they were at the end of 2010” said Kevin Armant, principal in Mercer’s Financial Strategy Group. “Because equities have also underperformed expectations, corporations who use a December 31 measurement date will likely see larger pension liabilities on their balance sheet, as well as higher 2012 pension expense.”  

“Plan sponsors also need to consider the impact of the falling interest rates and flat equity returns on 2012 contribution requirements” notes Craig Rosenthal, partner in Mercer’s Retirement, Risk and Finance business. “We had already anticipated the potential for large contribution increases due to declining interest rates, but if we end the year end with equity markets where they were at the end of November there could be even higher contributions for 2012 and beyond than were previously anticipated.”