S&P 1500 Pension Funding Level Remained Unchanged for October 2014

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies stayed at 84% as drop in rates offset gains from strong equity returns for the month.

Decreases in interest rates used to calculate corporate pension plan liabilities offset rising equity markets, keeping funded status constant. The collective estimated deficit of $367 billion as of October 31, 2014 is up modestly by $15 billion from the estimated deficit of $352 billion as of September 30, 2014, and up $131 billion from the beginning of the year, according to Mercer.

The S&P 500 index increased by 2.3% during October. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 12 basis points to 3.98%, driving liabilities upward, and wiping out positive plan asset performance.

“Even though slight decreases in interest rates this year have eliminated gains from a relatively strong year for equity markets, keeping funded status level this year, there have been some significant events over the past month that warrant plan sponsors to consider a change in their pension risk strategies for 2015,” says Jim Ritchie, a principal in Mercer’s retirement practice. 

“With the announcement from the Fed that it will end its quantitative easing program and the Society of Actuaries’ release of its new mortality tables, plan sponsors will want to be ready to take advantage of favorable economics that could provide significant savings in 2015,” Ritchie adds. “Should interest rates  rise in 2015, the effect would be to make annuity purchases and LDI strategies attractive in 2015. Those plan sponsors who have not executed term-vested cashouts in 2014 can still see significant savings in 2015 before the new mortality tables become effective for funding and lump sum determinations.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. This includes US domestic qualified and non-qualified plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2013, was $1.80 trillion, compared with estimated aggregate liabilities of $2.03 trillion. Allowing for changes in financial markets through October 31, 2014, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of October the estimated aggregate assets were $1.88 trillion, compared with the estimated aggregate liabilities of $2.24 trillion.