The pension plan deficit of S&P 1500 companies grew $59 billion in the first half of 2012 to $543 billion, according to new data by Mercer. The funded ratio of these plans is 74 percent as of June 30, 2012, compared to a 75 percent funded ratio in December 2011, when the deficit was $484 billion.
Although U.S. equity markets rose by 4 percent 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, Mercer found. 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.
Plan sponsors benefited from Congress’ passing of the Highway and Student Loan bill, which 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 comes with the new legislation certainly gives sponsors an incentive to keep their plans well-funded.”
Mercer is a global leader in human resource consulting and related services.