Pension Funding Deficits Grew $59B in 2012

July 3, 2012 ( - The aggregate deficit in pension plans sponsored by S&P 1500 companies grew $59 billion in the first half of this year, to $543 billion, according to new figures from Mercer.

This deficit corresponds to an aggregate funded ratio of 74% as of June 30, compared to a funded ratio of 75% as of December 31, 2011, at which point the aggregate deficit was $484 billion.   

Although U.S. equity markets rose by 4% during June as measured by the S&P 500 total return index, discount rates used to measure the pension liability fell by 24 to 32 basis points during the month, as measured by the Mercer Pension Discount Yield Curve. The yield curve hit an all time low for the second consecutive month, due primarily to the Moody’s action downgrading the credit ratings of 15 major banks on June 21. Because a number of the banks lost their AA credit ratings, they are now excluded from yield curves used to set pension accounting discount rates.   

A recently passed bill included a provision that will reduce the funding requirements for corporate plans by establishing a corridor around the 25-year average of interest rates used to determine liabilities in the calculation of minimum contribution requirements (see “Congress Passes Bill with Pension Funding Relief”). Mercer notes that plans that would otherwise fall below key funding thresholds will now have more time to improve the funding levels and avoid restrictions on their ability to pay some accelerated benefit forms, such as lump sums.  

In addition, an increase in PBGC premiums under the new legislation gives sponsors an incentive to keep their plans well funded (see “DB Sponsors Have Incentive to Keep Plans Well-Funded”).