Pension Plan Funding Rebound Continues in Q1 2012

April 3, 2012 ( - The aggregate deficit in pension plans sponsored by S&P 1500 companies fell to $336 billion as of March 31, 2012. 

This is a decrease of $147 billion from year-end 2011, according to new figures from Mercer. This deficit corresponds to an aggregate funded ratio of 82% as of March 31, 2012, compared to a funded ratio of 79% as of February 29 and 75% at December 31, 2011.

The increase in funded status in March was primarily attributable to positive asset performance during the month. U.S. equity markets were up approximately 3% for the month. Interest rates on high quality corporate bonds, which are used to measure the pension liability, also rose 15 basis points during the month, helping to lower the liability.

In addition to investment performance, assets have also grown due to contributions. During fiscal years ending in 2011, S&P 1500 plan sponsors contributed over $70 billion to their plans, which is $20 billion more than they had expected to contribute at this time last year. Financial disclosures indicate expected contributions of $54 billion during fiscal 2012.

With funded status improving, financial statements indicate a continued shift in asset allocation for plan sponsors. The weighted average allocation to fixed income investments increased from 37% at the end of 2010 to 40% at the end of 2011. This shift in plan sponsor investment philosophy is expected to dampen funded status volatility moving forward, but also indicates a decrease in expected returns: The average disclosed expected return on assets dropped from 7.78% for fiscal years ending 2010 to 7.56% for fiscal years ending in 2011.

However, there is still a large amount of dollars at risk. Mercer estimates that if equities remain flat, and interest rates fall 50 basis points, the aggregate S&P 1500 deficit would increase by about $100 billion. Likewise if rates rose 50 basis points the aggregate deficit would decrease by $100 billion.

“Certainly the funded status improvement we saw in the first quarter is a great outcome for most plan sponsors,” said Richard McEvoy, a partner with Mercer Investment Management group. “We are seeing many sponsors who have dynamic de-risking strategies in place reaching critical triggers to shift allocations from growth assets to liability matching assets. These strategies will help to dampen a relapse of funded ratios like we have seen three times in the last four years. The rise in funded status, combined with the significant funding we are seeing really should compel many plan sponsors to consider taking more risk off the table.”

Mercer estimates the aggregate combined funded status position of plans operated by S&P 1500 companies on a monthly basis. This is based on projections of their reported financial statements adjusted from each company’s financial year-end to February 29 in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all nondomestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2011, was $1.45 trillion, compared with estimated aggregate liabilities of $1.93 trillion. Allowing for changes in financial markets though the end of March 2012, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.56 trillion, compared with the estimated aggregate liabilities of $1.90 trillion as of March 31, 2012.