Corporate pension plans set a new record they won't likely be celebrating: Their overall funding deficit increased by nearly $146 billion in July alone, reaching $689 billion in the red.
According to research by Mercer, the aggregate deficit in pension plans sponsored by S&P 1500 companies is indeed a new record-breaker. This deficit corresponds to a record low aggregate funded ratio of 70 percent as of July 31, 2012, compared to a funded ratio of 74 percent as of June 30, 2012, at which point the aggregate deficit was $543 billion.
Although US equity markets rose 1.4 percent during July, discount rates fell another 30 to 55 basis points resulting in liability increases ranging from 3 percent to 11 percent during the month. The continued fall in US Treasury yields and the narrowing of corporate bond credit spreads led to discount rates hitting a new all-time low for the third consecutive month.
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"This record deficit proves that pension funded status volatility is showing no sign of abating, breaking the previous low of 71 percent at the end of September 2011," said Jonathan Barry, a partner with Mercer's Retirement, Risk & Finance consulting group, in a release.
"As we have turned past the halfway point for the year, sponsors really need to take a close look at how these deficits might impact their 2013 financials. Absent a significant rise in rates over the next five months, sponsors will be looking at higher year-end balance sheet deficits and P&L expense for 2013."
"NCR's recent announcement of accelerated cash funding and offering terminated vested participants a lump sum payment shows that options beyond funding the minimum required can still be very attractive," said Kevin Armant, a principal with Mercer's Financial Strategy Group.
"Sponsors also need to take a close look at the impact of market conditions and recent legislative changes on their funding strategy. Funding stabilization, enacted as part of MAP-21, will give sponsors an opportunity to lower near-term contribution requirements. But companies need to also consider the true economic deficit they are now facing, and may want to contribute more than is now required in order to help address this record deficit."
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