Pension Funding Levels at Post-WWII Low

October 4, 2011 ( - The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $134 billion during September, from a deficit of approximately $378 billion as of August 31, 2011, to $512 billion as of September 30, according to new figures from Mercer.

This deficit corresponds to an aggregate funded ratio of 72% as of September 30, compared to a funded ratio of 79% at August 31, 2011, and 81% at December 31, 2010. Mercer said it believes the end-of-month pension funding levels for the S&P 1500 are at a post-World War II low. The previous low point for funding was August 31, 2010, when the aggregate funded ratio was 71%, but the deficit at that point of $507 billion has grown as liabilities have increased.   

According to a Mercer news release, the decline in funded status was driven by a 7% drop in equities, and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical U.S. pension plan decreased approximately 30-40 basis points during the month. Mercer’s analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 16% decline.   

“With no expectation for a quick recovery, plan sponsors should evaluate the effects of the recent turmoil on their future cash requirements, as well as the impact on their P&L and balance sheet,” said Jonathan Barry, a Partner in Mercer’s Retirement Risk and Finance business, in the announcement.  “For some sponsors, the recent drop could result in falling below certain funding level thresholds under PPA which could lead to restrictions on lump sum payments and at the more extreme end, could result in a total freeze of benefit accruals.”       

“The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives,” said Kevin Armant, a Principal with Mercer’s Financial Strategy Group. “Those that were aware of the risks and can deal with the increased cash funding and P&L charges associated with the current market downturn may choose to stay the course. Those that can’t will continue to evaluate risk reduction opportunities, including increasing interest rate hedging programs, moving more into long corporate bond allocations or transferring risk through the introduction of a lump sum payment option or purchasing annuities. For both types of organizations, it’s likely that additional cash funding will be required and it may be useful to look at the option of accelerating those contributions, as some sponsors may have the capacity to take advantage of the low interest rate environment by borrowing to fund.”