Pension Funding Falls Back in October

Negative equity returns combined with relatively flat discount rates decreased funded status, according to Mercer. Substantial deficits persist, which will put pressure on plan sponsors’ financials at year end and in 2013.

Funding gains in September were erased, with the aggregate deficit in pension plans sponsored by S&P 1500 companies increasing by $26 billion during October, to $619 billion. This deficit corresponds to an aggregate funded ratio of 72% as of October 31. This is slightly above the record-low funded ratio of 70% seen at July 31, at which point the aggregate deficit was $689 billion.

The combination of equity markets dropping approximately 2% during October and discount rates falling about six basis points during the month increased the funding deficit. Mercer projects a significant increase in year-end balance sheet adjustments and P&L expense for many plans for 2013 and beyond.

“It is now likely that many plan sponsors will be facing significant pension deficits at the end of this calendar year,” said Richard McEvoy, leader of Mercer’s Financial Strategy Group. “This will mean higher year-end balance sheet deficits and P&L expense for 2013.”

McEvoy added: “Other than the funded status movement, the big development in October was Verizon’s landmark $7.5B annuity purchase. This is further evidence that plan sponsors are seriously beginning to address pension risk, and we expect this trend to accelerate in 2013.”