S&P 1500 Pension Funding Hits a High Point

July 2, 2013 (PLANSPONSOR.com) – The funding level for S&P 1500 pension plans rose to its highest point since 2011, according to a recent analysis by Mercer.

The consulting firm found the funding level continued a strong rebound in 2013, with the aggregate deficit decreasing by $47 billion during the month of June and resulting in a $222 billion deficit as June 30, 2013. The funded ratio (assets divided by liabilities) increased from 86% to 88% during June, up 14% since the end of 2012 and reached their highest level since October 2008.

According to Mercer, the continued rise in interest rates, following Federal Reserve Chairman Ben Bernanke’s comments on the potential phase out of quantitative easing, drove down pension liabilities, which are discounted using high quality corporate bond rates. Discount rates for a typical pension plan rose 33 to 42 basis points during June, after having already risen 46 basis points during May. However, equity markets stumbled slightly during the month with the S&P 500 index losing 1.5%, dampening the improvement slightly.

The analysis also showed an estimated 15% of plan sponsors had assets in excess of their pension obligations as of June 30, compared with only 4% at December 31, 2012. Mercer also estimated that if discount rates rose another 1%, the number of plan sponsors with fully funded pension obligations could exceed 37%.

“All of this serves as a reminder of the volatility that pension plans are exposed to and how quickly things can change—a 14% increase in the funded ratio over just six months,” said Richard McEvoy, leader of Mercer’s Financial Strategy Group. “Rising rates have helped reduce funding liabilities and therefore we have seen funded status improve. We could easily see a large increase in fully funded plans if rates were to increase another 50 basis points from current levels.”

McEvoy recommended plan sponsors have specific goals and objectives, bearing in mind the degree of volatility they face through interest rate movements, as well as in equity market returns. While such movements have been favorable over the early part of this year, he pointed out that markets can decline just as rapidly, so plan sponsors should be ready to execute their goals and objectives.