Pension Funding Hits Five-Year High

The funded ratio reached 91% at month’s end, according to consulting firm Mercer. This ratio corresponds to a deficit of $182 billion as of September 30, 2013, which is down significantly from the estimated deficit of $557 billion as of December 31, 2012.

Despite volatility amidst concerns about a government shutdown, equity markets saw gains during the month with the S&P 500 Index increasing 3%. Yields on high grade corporate bond rates spiked during the month, but subsequently fell after the Federal Reserve gave indications it would continue its bond purchasing program.

The month ended with bond yields slightly lower than the end of August, with the Mercer Yield Curve discount rate for mature pension plans falling from 4.63% to 4.58%, but still up 92 basis points year-to-date. Mercer also estimated 20% of plans sponsored by S&P 1500 companies are now more than 100% funded, up from only 4% at the end of 2012.

“It’s been a long road for plan sponsors to get back over a 90% funded status”, said Jonathan Barry, a partner in Mercer’s Retirement business. “Furthermore, these plans have recovered over $500 billion from the deficit level in just over a year, from a deficit high water mark of $689 billion at the end of July 2012. This demonstrates the level of volatility to which these plans are potentially exposed.“

“With this rapid improvement also comes the opportunity for sponsors to take some of the pension plan risk off the table, through changes in investment policy, risk transfer strategies, or a combination of both,” added Richard McEvoy, a partner in Mercer’s Investments business. “The key is to have a plan in place, to capitalize on the improvement. We have seen too many times where these high funded ratios decline quickly due to market events and plan sponsors lose out on the funded status gains.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to September 30, 2013 in line with financial indices.