Decreases in interest rates used to calculate corporate pension plan liabilities more than offset rising equity markets and led to the decline in funded status. The collective estimated deficit of $369 billion as of August 31 is up $29 billion from the estimated deficit of $340 billion measured at the end of July, and up $133 billion from the beginning of the year, Mercer estimates.
While the S&P 500 index showed strong earnings of about 3.8% during August, typical discount rates for pension plans, as measured by the Mercer Yield Curve, decreased by 20 basis points to 3.90%. This had the effect of driving liabilities upward and more than offset the growth in plan assets.
“Interest rates continue to decline in 2014 despite many observers’ expectations, held for some time in the low interest rate environment, that rates would increase,” says Jim Ritchie, a principal in Mercer’s retirement practice. “Barring any increase in bond yields before the year end, companies will be facing more significant disclosed deficits and pension costs for 2015. As many plan sponsors are executing risk transfer strategies this year, the fall in interest rates should lead them to re-evaluate risk management strategies for 2015 and beyond, including revisiting asset allocation and glidepath policies, as well as risk transfer opportunities such as participant cashouts or annuity buyouts.”
The Mercer U.S. Pension Buyout Index found that during July, the average cost of purchasing annuities from an insurer increased from 108.7% to 109.0% of the accounting liability. During the same period, the economic cost of maintaining the liability remained level at 108.7% of the accounting liability.
Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimated aggregate value of pension plan assets of the S&P 1500 companies—including U.S. domestic qualified and non-qualified plans and all non-domestic plans—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 August 31, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of August the estimated aggregate assets were $1.90 trillion, compared with the estimated aggregate liabilities of $2.27 trillion.