S&P 1500 Pension Deficits Lower in January

February 2, 2012 (PLANSPONSOR.com) - The aggregate deficit in pension plans sponsored by S&P 1500 companies was $431 billion at January 31, 2012, a decrease of $53 billion from year-end 2011.

This deficit corresponds to an aggregate funded ratio of 78% as of January 31, 2012 compared to a funded ratio of 75% at December 31, 2011, according to figures from Mercer.  

The increase in funded status in January was primarily attributable to positive asset performance during the month. U.S. equity markets were up over 4.5% for the month, and U.S. fixed income returned over 1.5%. However, interest rates on high-quality corporate bonds, which are used to measure the pension liability, saw the yield curve steepen during the month meaning mature plans could see their discount rates fall by up to 20 basis points.  

“The coming year is shaping up to be a challenging one for pension plan sponsors,” said Kevin Armant, a principal with Mercer’s Financial Strategy Group. “Over the past few weeks, we have seen many companies announce significant increases in planned contributions to pension plans, as they need to begin dealing with these deficits. We expect to see additional announcements of large cash contributions to plans as companies file their I0Ks over the next few weeks, and expect this will carry into 2013.”   

Armant added, “Although January was a strong month for equity returns, a modest decline in interest rates offset those returns to large degree. It really highlights the level of interest rate risk that most U.S. pension plans are exposed to. It appears that many plans are, in effect, making an implicit bet on interest rates rising, but with the recent announcements by the Fed, it is likely that we are looking at a low rate environment for the next few years.”