Pension Funding Levels Take a Dive in August

September 6, 2011 ( - The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $73 billion during August, from a deficit of approximately $305 billion as of July 31, 2011, to $378 billion as of August 31, according to new figures from Mercer.

This deficit corresponds to an aggregate funded ratio of 79% as of August 31, compared to a funded ratio of 83% at July 31, 2011, and 81% at December 31, 2010.   

Mercer said the decline in funded status was driven by a 5.4% 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 7-9 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 9% decline.  

Despite what seems to be unprecedented market volatility, Mercer’s analysis indicates that funded status swings like this are not as unlikely as one might think, and plan sponsors should be prepared for continued volatility going forward.  “For the typical pension plan invested 60% in equities and 40% in aggregate fixed income, the monthly volatility of funded status is between 3% and 4%. The decline in August shouldn’t be seen as an outlier and there is the potential for even more volatility prior to the end of the year,” said Kevin Armant, a principal in Mercer’s Financial Strategy Group, in a news release.  

“After the market downturn in 2008, Congress passed a version of funding relief that helped plan sponsors reduce their required contributions to plans in 2009 and 2010.” said Jonathan Barry, a Partner with Mercer’s Retirement Risk and Finance Group. “For the most part, those techniques that were used to lower contributions are no longer available, and plan sponsors will likely face significant funding increases in 2012 and beyond, especially if the conditions from August continue through year-end.