S&P 1500 Pension Deficit Improves in June

The consulting firm finds that the estimated aggregate funding level for these DB plans increased by 1% in the month of June, ending the second quarter of 2014 with a funded ratio of 85%. Small gains in equity markets accompanied by increases in interest rates used to calculate corporate pension plan liabilities drove the improvement in funded status.

While the collective estimated deficit of $330 billion (as of June 30) was down $13 billion from the estimated deficit of $343 billion (as of May 31), it has increased by $94 billion from the deficit of $236 billion seen at the beginning of the year, says Mercer. This translates into a year-to-date decrease in funded status of approximately 3%.

The analysis also finds that U.S. equity markets earned about 1.9% during June based on the S&P 500 Index. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by one basis point to 4.07%, a slight improvement since last month’s low point, which drove liabilities downward.

“Even with the very positive returns we have seen in most equity markets this year, overall, U.S. corporate pension plans have lost ground since the beginning of the year due to a 50 to 60 basis point drop in discount rates,” says Jonathan Barry, a partner in Mercer’s Retirement business, based in New York.

Barry explains that since the market downturn in 2008, there have been a number of chances to lock in funded status gains, but that many plan sponsors missed out on those chances. He adds, “Now we are seeing a big uptick in the number of sponsors looking to manage this volatility and avoid the ups and downs of the market. In particular, 2014 and 2015 look to be big years for sponsors to execute on cashout programs for former employees, which can serve to shrink the size of the plan and lower various costs associated with managing pension programs.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to June 30 in line with financial indices. This includes U.S. domestic qualified and non-qualified plans and all non-domestic plans.

The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2013, was $1.80 trillion, compared with estimated aggregate liabilities of $2.03 trillion. Allowing for changes in financial markets through June 30, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of June the estimated aggregate assets were $1.88 trillion, compared with the estimated aggregate liabilities of $2.21 trillion.