S&P 1500 Sees Improved Pension Funding

February 5, 2013 (PLANSPONSOR.com) – The new year began with a funding improvement for S&P 1500 pension plans, due to January equity gains, a rise in interest rates and increased volatility.

By January’s end, the aggregate deficit in pension plans sponsored by S&P 1500 companies decreased by $74 billion to $482 billion, about the same level as at the end of 2011, Mercer reports. The month’s improvements were driven by strong equity markets, which gained more than 5%, and an increase in interest rates of about 15 to 20 basis points, which reduced liabilities.

The pension plans’ funded ratio (assets divided by liabilities) increased from 74% to 77% in January. As of December 31, 2012, the estimated aggregate value of S&P 1500 company pension plan assets was $1.59 trillion, compared with estimated aggregate liabilities of $2.14 trillion.  Allowing for changes in financial markets through January 31, 2013, changes to the S&P 1500 constituents and newly released financial disclosures, Mercer estimated the companies’ aggregate assets at $1.62 trillion and the aggregate liabilities to be $2.11 trillion. 

“U.S. pension plans are off to a good start in 2013, and it’s significant that in a single month the funding erosion that occurred in 2012 has been erased and we are back to about the same deficit level as at the end of 2011,” said Jonathan Barry, a partner in Mercer’s Retirement business.

Barry urged sponsors to be wary of this improvement, however, saying that the rebound is symptomatic of recently increased volatility levels. “It is important to realize we have had numerous examples over the past few years of funded status improvements quickly being wiped out by adverse market movements,” he said. “In both 2011 and 2012 there were monthly improvements in funded status early in the year, only to experience market conditions that saw year-end funding levels below the start of the year.”