According to a report from benefits consulting firm Mercer, the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained at 85% as of the end of July 2014. The month’s drop in equity markets, accompanied by slight increases in interest rates used to calculate corporate pension plan liabilities, held funded status relatively flat compared with the prior month.
The collective estimated deficit of $340 billion as of July 31 is up $10 billion from the estimated deficit of $330 billion as of June 30—and up $103 billion from the beginning of the year. Mercer says this is largely a result of U.S. equity market declines of about -1.5% during July. Meanwhile, the typical discount rate for pension plans as measured by the Mercer Yield Curve increased by three basis points to 4.10%, driving liabilities slightly downward but not enough to make up for negative market returns.
“The funded status of pension plans sponsored by S&P 1500 companies has remained relatively stable over the last five months,” explains Jim Ritchie, a principal in Mercer’s retirement practice. “Modest gains in the equity markets have been offset by a gradual decrease in discount rates.”
However, Ritchie believes two recent developments may have a material impact on the funded status of pension plans heading into 2015. One is the recent highway bill, passed by both houses of Congress and awaiting President Barack Obama’s approval, which would have the effect of lowering minimum funding requirements for plan sponsors by allowing private companies to assume higher interest rates in measuring pension liabilities. Higher rates will have the potential to reduce pension liabilities, but will also have the effect of potentially reducing the tax-deductible minimum required contributions that companies must make to fund their pension plans.
Ritchie also says the current environment will likely lead more plan sponsors to settle pension liabilities with former employees by offering them lump sum cashouts.
— Matthew Miseli