Pension Funding Tumbles to Record Low

September 1, 2010 ( – U.S. pension plan funded positions have fallen to historic lows during August because of simultaneously falling equity markets and interest rates, according to new Mercer data.

A Mercer news release said the August decline erased modest gains made in July and pushed the health of pension plans, as measured on a mark-to-market basis, to all-time lows. 

The deficit in pension plans sponsored by S&P 1500 companies increased by $76 billion to $506 billion at the end of August, the largest ever recorded by S&P 1500 companies and more than double their 2009 year-end deficit of $247 billion.  The end-of-August deficit corresponds to a funded status of 71%, compared to a funded status of 75% at the end of July and 84% on December 31, 2009.

“If the low funded status persists until the end of 2010 when two-thirds of companies have their financial years end, net balance sheet liabilities and income statement expense for 2011 will increase significantly for many companies. Cash contributions will also need to increase to reduce the deficit,” said Gordon Young, the Integrated Retirement Financial Management leader for Mercer in the U.S., in the news release “Some of this may be mitigated by various smoothing methods and pension funding relief, but nonetheless these market conditions will certainly grab the attention of plan sponsors.”

For most of 2010, equity values have experienced significant volatility. For example, equity returns were up 7% in July and down 5% in August. In addition to equity volatility, there remains concern over the level of the AA bond yield, which has been steadily declining in 2010, reaching 4.94% (for a mature plan) as of the end of August, the lowest yield in a decade.

The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2009, was $1.25 trillion, compared with estimated aggregate liabilities of $1.50 trillion, Mercer said. Allowing for changes in financial markets though the end of August 2010, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.27 trillion, compared with the estimated value of the aggregate liabilities of $1.77 trillion.