Pension Funding Levels See Uptick in November

December 2, 2010 ( – Though pension funding levels improved in November, they have not recovered to year-end 2009 levels, implying a potential December 31 hit to corporate balance sheets.

The deficit in pension plans sponsored by S&P 1500 companies decreased by $14 billion to $359 billion at the end of November, according to new figures from Mercer. This deficit corresponds to a funded status of 79%, compared to a funded status of 78% at the end of October and 84% on December 31, 2009.

A Mercer news release said equity markets were flat during November after returning 9% in September and 4% in October. The yields on long maturity AA bonds, which declined to historic lows as of the end of August, rose for the third straight month, increasing by approximately 10 basis points in November. Because pension plan liabilities are valued using similar AA bond yields, the result was generally higher discount rates and lower liabilities for most plans as of the end of November.   

Year to date, equity markets have returned approximately 9%. However, as compared to December 31, 2009 levels, discount rates are lower. In addition, because the yield curve has steepened in the past year, the discount rates for more mature, shorter duration plans will have declined more than the discount rates for younger, longer duration plans.  

“Even though asset returns have been better than expected through the first 11 months of 2010, the funded status for most plans is still lower than it was at the end of last year due to the decline in interest rates” said Kevin Armant of Mercer’s Financial Strategy Group, in the announcement. “If interest rates and equity markets do not change significantly over the next month, most companies will report a higher pension deficit than they did at December 31, 2009 – a direct charge to the balance sheet. Generally speaking, this will also drive higher cash contributions and P&L expense for 2011, factors sponsors should incorporate into their budgeting for next year.”