New Year Brings Pension Setback

This resulted in a funded ratio (assets divided by liabilities) of 89% at the end of the month. The collective deficit of $232 billion as of January 31, 2014, is up $129 billion from the estimated deficit of $103 billion as of December 31, 2013.    

In addition, steep U.S. equity market drops on the first trading day of February are estimated to have shaved nearly 2% more off of the funded status.

Equity markets fell more than 3% during January, based on the S&P 500 Index. Compounding problems, the yields on high grade corporate bonds also fell, leading to an increase in pension liabilities. The Mercer Yield Curve discount rate for mature pension plans dropped 35 basis points during the month after having risen almost a full percent during 2013.

“This was a rough start to the year for plan sponsors.” says Jonathan Barry, a partner in Mercer’s retirement business. “After a record-breaking 2013 in terms of funded status improvement, it hurts to see such a big step backwards right out of the gate in 2014. 

“This downturn serves as a reminder that there is still a great deal of risk in U.S. pension plans. There are many opportunities available for sponsors to manage this risk, although sponsors need to be prepared to move quickly when opportunities present themselves. Even with this dip in January, funded status and interest rates are still well above where they were last year, and the recent increases in PBGC premiums are making many sponsors consider funding their plans more aggressively as well as looking at risk transfer strategies such as cashouts and buyouts. We still see 2014 as being a big year in terms of pension risk management initiatives.”

Mercer’s Pension Buyout Index shows that as of the start of the year, pension buyouts are a more attractive option than before (see “PBGCPremium Hikes Shake Up Buyout Landscape”).