The aggregate deficit in pension plans sponsored by S&P 1500 companies grew $59 billion in the first half of 2012 to $543 billion, according to new figures from Mercer Investment Consulting, Inc. This deficit corresponds to an aggregate funded ratio of 74% as of June 30, 2012 compared to a funded ratio of 75% as of December 31, 2011, at which point the aggregate deficit was $484 billion.
Although U.S. equity markets rose by 4% during June as measured by the S&P 500 total return index, discount rates used to measure the pension liability fell by 24 to 32 basis points during the month, as measured by the Mercer Pension Discount Yield Curve. The yield curve hit an all-time low for the second consecutive month, due primarily to the Moody’s action downgrading the credit ratings of 15 major banks on June 21. Because a number of the banks lost their AA credit ratings, they are now excluded from yield curves used to set pension accounting discount rates.
Sponsors did see some relief, however, as the passage by Congress of the Highway and Student Loan bill included a provision that will reduce the funding requirements for corporate plans, by establishing a corridor around the 25-year average of interest rates used to determine liabilities in the calculation of minimum contribution requirements. Plans that would otherwise fall below key funding thresholds will now have more time to improve the funding levels and avoid restrictions on their ability to pay some accelerated benefit forms, such as lump sums.
“While these lower near-term contribution requirements will, rightly, be welcomed by many plan sponsors, the reduction in funding could lower overall funded status of U.S. pension plans in the short term,” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business.
Mercer estimates that the relief could be in the range of $40 to $50 billion for S&P 1500 plan sponsors for 2012 and could total well over $100 billion through 2014. “All things being equal, that reduction in funding will reduce overall funded status from what it would otherwise have been had funding stabilization not been passed,” said Barry. “We suggest that plan sponsors take the opportunity to review their pension contributions in light of both the new rules and their broader pension risk management framework. The increase in PBGC premiums that come with the new legislation certainly give sponsors an incentive to keep their plans well-funded.”
In other pension news, Milliman, Inc.’s latest Pension Funding Index found that 100 of the nation’s largest defined benefit pension plans experienced a $57 billion decrease in funded status in June based on a $77 billion increase in the pension benefit obligation (PBO) and a $20 billion increase in asset value. The $57 billion decrease in funded status pairs with the combined April and May decreases of $129 billion, increasing the funding deficit by $186 billion during the second quarter.
“With the help of the lowest discount rate in the 12-year history of our study, corporate pensions last month saw their funding deficit increase to a near-record $415 billion,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “This is the second worst deficit we’ve seen.”
In June, the discount rate used to calculate pension liabilities fell from 4.56% to 4.32%, pushing the PBO up to $1.698 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.263 trillion to $1.283 trillion.
Looking forward, Milliman surmises that if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.32% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from 75.6% to 77.4% by the end of 2012 and to 82.0% by the end of 2013.
