Benefits and Compensation

Corporate Pensions’ Funded Status Continued to Improve in September

Corporate pensions’ September funding levels continued to recover, gaining ground on rising interest rates that reduced the funds’ liabilities. Three benchmark measures of the funded status of typical corporate retirement plans all showed improvement from August and record-low levels recorded earlier this year.

Pension liabilities, or benefit obligations, of the 100 largest corporate defined benefit plans fell by $30 billion in September, while the corresponding pension assets improved by $15 billion, lowering the Milliman 100 Pension Funding Index pension deficit to $453 billion and increasing the funded ratio to 74.5 percent. The PFI’s asset value increase, a result of the September investment gain of 1.32 percent, raised the index’s value to $1.325 trillion from $1.310 trillion at the end of August.  The decline in liabilities came from a modest increase of nine basis points in the monthly discount rate to 4.08 percent for September, up from 3.99 percent for August.

The Sept. 30, 2012, funded ratio still lags behind its Dec. 31, 2011, value of 78.7 percent, however. The ratio stood at 72.4 percent at the end of August.

In the Milliman index, September’s funded-status improvement was fueled by an increase in the corporate bond interest rates used to value pension liabilities. September marks the second consecutive month of discount rate increases after the PFI’s dismal performance between March and July, when the pension deficit swelled in response to declining discount rates. Milliman, an actuarial services and consulting firm, gets the data for its monthly PFI from the 100 largest DB plans sponsored by U.S. public companies.

In a similar monthly survey, BNY Mellon reported that the funded level of U.S. corporate pensions it monitors for its Pension Summary Report rose 1.8 percentage points to 75 percent for September. The rise, for the second straight month, had not occurred since February, the investment management company said. BNY Mellon also cited rising interest rates as the reason for its pension-funding measurement’s increase. Assets for the typical plan it surveys rose 1.7 percent on stronger stock prices in the month, while liabilities slipped 0.7 percent as the double-A corporate discount rate rose.

A third indicator of corporate pension funding status, from global human resources consulting firm Mercer, also showed a drop in liabilities and gain in asset value in September.  The aggregate deficit in pension plans sponsored by S&P 1500 companies that Mercer measures decreased by $38 billion during September to $593 billion. That deficit corresponds to an aggregate funded ratio of 73 percent, compared with a record low funded ratio of 70 percent at the end of July 2012, when the aggregate deficit was $689 billion.

In a press release, the firm reported that “substantial deficits persist, which will put pressure on plan sponsors’ financials.” Mercer predicts a significant increase in year-end balance sheet adjustments and profit-and-loss expense for many plans for 2013 and beyond.

“While most sponsors have an opportunity to lower near-term contribution requirements, companies should be sure to consider the true deficit they are now facing, and may want to contribute more than these new requirements to help address this shortfall,” Jonathan Barry, a partner with Mercer’s Retirement Risk and Finance business, said, referring to IRS guidance on pension funding relief released in September based on the Moving Ahead for Progress in the 21st Century Act.

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