Two indicators of U.S. corporate pension health topped 90-percent funding ratios for September, a significant sign of improvement in the vitality of defined benefit plans.
Mercer’s S&P 1500 Indicator Rises
Funding levels of DB plans sponsored by Standard & Poor’s 1500 companies monitored monthly by human resources consultant Mercer improved in the latest month, reaching a funded ratio (assets divided by liabilities) of 91 percent at the end of the month, the highest level seen since October 2008. This ratio corresponds to a deficit between pension benefit obligations and available funding for PBO of $182 billion as of Sept. 30, according to an Oct. 2 Mercer news release. This led to a much-reduced gap from December 2012’s estimated deficit of $557 billion.
Despite volatility amid concerns about a government shutdown, equity markets gained during the month, with the S&P 500 index increasing 3 percent. Yields on high-grade corporate bond rates, which are used to measure pension liabilities, jumped during the month, but later fell after the Federal Reserve gave indications that it would continue its bond purchasing program.
Of note, Mercer’s report estimated that 20 percent of pension plans sponsored by S&P 1500 companies are now more than 100-percent-funded, up dramatically from only 4 percent at the end of 2012.
DB plans have struggled in recent years to maintain required funding levels amid low interest rates. Many companies in 2012 had to inject reserves into their plans to keep from falling into “underfunded” status, which traditionally has been regarded as a funding ratio below 80 percent. Plans with assets below that level may have trouble meeting obligations to retirees and other beneficiaries or face benefit restrictions established by the Pension Protection Act of 2006.
“It’s been a long road —nearly five years — for plan sponsors to get back over a 90-percent-funded status,” said Jonathan Barry, a Mercer retirement business partner. “Furthermore, these plans have recovered over $500 billion from the deficit level in just over a year, from a deficit high-water mark of $689 billion at the end of July 2012. This demonstrates the level of volatility to which these plans are potentially exposed.”
BNY Mellon ‘Typical’ Plans Index Also Breaks 90
Another indicator also broke above 90-percent funded status in September for the pensions it monitors, BNY Mellon Investment Strategy & Solutions Group said in an Oct. 3 news release.
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For more information about funding balances, adjusted funding target attainment percentage and benefit restrictions for underfunded retirement plans, see ¶132 in the Pension Plan Fix-It Handbook. Fig. 132-A explains rules that determine if a plan is underfunded.