By Jane Meacham
The funded status of the average U.S. corporate pension plan slid to a record low in July, according to several measurements of the health of the plans’ finances.
Funding status of the typical plan surveyed for BNY Mellon Pension Summary data touched a low of 68.7 percent, off 2.9 percentage points from the previous month, according to the investment manager. The typical plan funding level in July was at the lowest point since BNY Mellon began tracking it nearly five years ago. The funded status of the typical plan has now fallen 3.7 percentage points during 2012, BNY Mellon said. The July BNY Mellon Pension Summary Report, released Aug. 3, said the month’s decrease was driven by a sharp spike in liabilities, which increased 5.5 percent, outpacing a 1.2-percent gain in assets at the typical corporate plan during the month.
The rise in liabilities resulted from the 34 basis-point drop in the AA corporate discount rate to 3.64 percent. Plan liabilities are calculated using the yields of long-term investment-grade bonds. Lower yields on these bonds result in higher pension liabilities.
Another study of July corporate retirement plans’ funded status also hit a record low. Mercer Investment Consulting Inc. said the aggregate deficit in pension plans sponsored by Standard & Poor’s 1500 companies rose to a high of $689 billion for the month, leading to a funded ratio of 70 percent, down from 74 percent in June, with a deficit of $543 billion. Mercer also blamed the continued fall in U.S. Treasury yields and narrowing corporate bond credit spreads for the record lows in pension plan funding.
And a third U.S. pension fund indicator, calculated by actuarial consulting firm Milliman, underscored the surge in fund liabilities in July. The Milliman 100 Pension Funding Index registered $133 billion in pension liabilities in the month, which overwhelmed an investment gain of $13 billion and corresponded with funded status for the 100 largest U.S. corporate defined benefit pension plans surveyed dropping to 70.9 percent. The $120 billion month-on-month decrease in funded status for the 100 PFI companies Milliman surveys was the largest drop recorded in the index’s 12-year history.
While noting recent announcements by some large companies of accelerated cash funding and lump-sum payouts to terminated vested plan participants to counteract rising pension liabilities, Kevin Armant, of Mercer’s Financial Strategy Group offered this advice for plan sponsors:
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 by 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 now is required in order to help address this record deficit.
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