Pension plans sponsored by S&P 1500 companies saw a $41 billion drop in their pension deficits in October, according to Mercer. The deficit went from about $512 billion at the end of September 2011 to $471 billion at the end of October. Pensions were funded at a ratio of 75 percent as of Oct. 31, compared to a funded ratio of 72 percent at the end of September and 81 percent on Dec. 31, 2010.
The increase in funded status was driven by an 11 percent gain in equities, partially offset by the continued decrease in yields on high-quality corporate bonds during October. Discount rates for the typical U.S. pension plan decreased approximately 15 basis points during the month. Mercer's analysis indicates the S&P 1500 funded status peaked at 88 percent at the end of April, and had seen a 16 percent decline before rebounding this past month.
"Market volatility continues to make many plan sponsors very uneasy" said Jonathan Barry, a partner with Mercer's Retirement, Risk and Finance business. "While most of October showed gradual improvement in funded status, we actually saw a 3 percent drop in funded status in just the last two days of the month. Furthermore, it is likely that much of the gain we saw in October was wiped out in just the first day of November."
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Craig Rosenthal, a partner with Mercer, who authored Mercer's recent analysis of 2011 pension funding outcomes, said that, "Sizable increases in funding requirements were already expected for 2012, due to declining interest rates, and the results of the further downturn this year could exacerbate the situation. The effect of these recent events will place additional pressure on pension plan funding levels and trigger higher required contributions for coming years due to the short time for funding deficits under PPA."
In light of this data, plan sponsors need to evaluate their risk reduction opportunities through investment strategies, liability transfer opportunities, plan design and funding policy, the company stated.
Mercer is a global leader in human resource consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues by designing, implementing and administering health, retirement and other benefit programs.
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