Funding gains by U.S. corporate pension plans in September were erased in October, according to data Mercer Investment Consulting Inc. released Nov. 5. Mercer reports that the aggregate deficit in pension plans S&P 1500 companies sponsored increased by $26 billion during the latest month, to $619 billion. This deficit corresponds to an aggregate funded ratio of 72 percent as of Oct. 31, 2012, slightly above the record-low funded ratio of 70 percent recorded at the end of July 2012. At that point, the aggregate deficit was $689 billion.
Mercer said the combination of equity markets dropping about 2 percent during October and discount rates falling about six basis points at the same time widened the plans’ funding deficit. Mercer projects a significant impact in 2013 for pension plan sponsors as a result of several months of retirement plan funding levels hovering near 70 percent. Plan liabilities are calculated using the yields of long-term investment-grade bonds. Lower yields on these bonds result in higher liabilities.
“It is now likely that many plan sponsors will be facing significant pension deficits at the end of this calendar year. This will mean higher year-end balance sheet deficits and P&L expense for 2013,” said Richard McEvoy, leader of Mercer’s Financial Strategy Group.
Mercer estimates the aggregate combined funded status position of plans operated by S&P 1500 companies on a monthly basis.
Another pension funding indicator for typical corporate plans, issued by money management firm BNY Mellon, posted a decline in October also attributed to lower interest rates and U.S. stock prices.
BNY Mellon’s Pension Summary Report for October, released Nov. 5, fell by 1.4 percentage points from September to 73.6 percent. For the year through Oct. 31, the funded status has declined 1.7 percentage points, according to the October report.
Assets for the typical plan monitored fell 0.7 percent as the equities rally in international markets failed to offset the decline in U.S. markets, BNY Mellon said. Liabilities for the typical plan increased 1.1 percent as the AA corporate discount rate declined six basis points to 3.72 percent, BNY Mellon said in a press release.
Finding out More
For more information about funding balances, adjusted funding target attainment percentages and underfunded retirement plans, see ¶132 in the Pension Plan Fix-It Handbook.