Recent Market Drop Deals a Severe Blow to Pensions

August 9, 2011 ( - According to the latest figures by Mercer, Market volatility in the first six trading days of August has dealt a severe blow to pension plans sponsored by S&P 1500 companies.

The aggregate funded status has decreased by $191 billion to a funding deficit of $496 billion and an aggregate funded ratio of 73% as of the market close on August 8. Mercer said this deficit corresponds to a 10% reduction in just six days from its calculation of an 83% funded ratio as of July 31, and a 15% reduction from the peak funded status measured in April of 88%.  

A news release explained that pension plans are affected not only by changes in the assets they hold but also by the market value of their pension commitments – effectively a debt sponsors hold on their balance sheets.  The recent flight to quality is bad for pension plans on two counts – reducing the value of their risky assets while increasing the market value of their pension debt.  

The decline in funded status was driven by a 13% drop in equities, combined with a fall in yields on high quality corporate bonds during the first six trading days of the month. Discount rates for the typical U.S. pension plan decreased approximately 42 basis points over this period.