Pension Deficit Reaches New High

August 3, 2012 ( - The aggregate deficit in pension plans sponsored by S&P 1500 companies reached a record high in July.

The deficit grew $146 billion to $689 billion, according to new figures from Mercer. It corresponds to a record low aggregate funded ratio of 70% as of July 31, compared to a funded ratio of 74% as of June 30, at which point the aggregate deficit was $543 billion.

Although U.S. equity markets rose 1.4% during July, discount rates fell another 30 to 55 basis points resulting in liability increases ranging from 3% to 11% during the month. The continued fall in U.S. Treasury yields and the narrowing of corporate bond credit spreads led to discount rates hitting a new all-time low for the third consecutive month.

“This record deficit proves that pension funded status volatility is showing no sign of abating, breaking the previous low of 71% at the end of August 2010,” said Jonathan Barry, a partner with Mercer’s Retirement, Risk & Finance consulting group. “As we have turned past the halfway point for the year, sponsors really need to take a close look at how these deficits might impact their 2013 financials. Absent a significant rise in rates over the next five months, sponsors will be looking at higher year-end balance sheet deficits and P&L expense for 2013.

Some companies, such as NCR (See “Another Company Offering Lump-Sums to De-Risk Pension”), have taken to derisking.

“[Their] recent announcement of accelerated cash funding and offering terminated vested participants a lump sum payment shows that options beyond funding the minimum required can still be very attractive,” said Kevin Armant, a principal with Mercer’s Financial Strategy Group. “Sponsors also need to take a close look at the impact of market conditions and recent legislative changes on their funding strategy. Funding stabilization, enacted as part of MAP-21, will give sponsors an opportunity to lower near-term contribution requirements. But companies need to also consider the true economic deficit they are now facing, and may want to contribute more than is now required in order to help address this record deficit.”

The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2011, was $1.45 trillion, compared with estimated aggregate liabilities of $1.93 trillion. Allowing for changes in financial markets through the end of July, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.57 trillion, compared with the estimated aggregate liabilities of $2.26 trillion as of July 31.