A new in-depth analysis by Mercer finds that 2012 is shaping up as another challenging year for U.S. pension plan sponsors, following on the heels of 2011’s funding deficits. Risk management has become the top priority for many as sponsors’ expectations of asset returns continue to decline.

The funded status of defined corporate benefit pension plans declined from 81% at the end of 2010 to 75% at the end of 2011, Mercer says. The number of plans considered to be “high risk” is up almost 70% for the same period.

This is all despite a record $70 billion in pension contributions.

With the cost of new benefits accruing remaining fairly stable at $30 billion between 2009 and 2011, the amount of additional contributions to cover funding shortfalls has quadrupled from $10 billion in 2008 to more than $40 billion in 2009, 2010 and 2011.

Funding deficits have topped 2009 levels as declining interest rates have driven up personal liabilities and plan assets and equity markets have not met expectations. The median asset return has dropped from 18.6% for 2009 to 12.1% in 2010 and a dismal 2.9% in 2011.

Meanwhile the median pension liability grew by 13.7% in 2011, the third consecutive year liability returns topping 10%.

Since 2008, there have been steady declines in the expected return on assets for pension plans, a trend Mercer expects to continue in the face slow global market growth. The EROA will likely drop further as more plan sponsors move to higher fixed-income allocations, they say.

And, months before the end of 2012, the year has already provided plenty of shake-ups for providers that Mercer says will make final numbers interesting to behold. To date:

  • Enactment of the Moving Ahead for Progress in the 21st Century Act (MAP-21), which offers sponsors the chance to lower pension funding requirements
  • Further declines in discount rates, including massive credit downgrades
  • The Society of Actuaries’ review of mortality assumptions, which will likely result in plan sponsors taking a large benefit obligation
  • Ford and GM both announcing de-risking strategies to remove a portion of their pension liabilities from their balance sheets, including an annuity purchase and offering buyouts to retirees and former workers

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