Mercer's newest study of the corporate defined benefits landscape offers a grim picture of the industry, as 2011's funding deficits dropped back to levels felt in 2009, even with a record $70 billion added as contributions during the year.
The report, "How Does Your Retirement Program Stack Up - 2012," suggests that the funded status of the S&P 1500's pension plans has continued on a downward slide. In Dec. 2010, the number was 81 percent; a year later, it had dropped to 75 percent and as of July 31, 2012, the plans hit a record low of 70 percent, a $689 billion shortage overall.
The major contributing factor, the survey says? Median asset return for 2011 was only 2.9 percent, while it had been 12.1 percent in 2010 and 18.5 percent in 2009.
At the same time, median liability growth was 13.7 percent, the thrid year in a row with over-10-percent growth. Continued worries about the European debt crisis, credit downgrades of several major international banks and the overall state of the U.S. economy suggests that things won't improve significantly any time soon.
Eric Veletzos, author of the study, said an even bigger problem is the prevalence of plans which clearly have major funding issues and could easily collapse, despite being attached to big-name companies.
“The prevalence of ‘risky’ plans among S&P 1500 companies increased from 4.7 percent during 2010 to 7.1 percent during 2011, an increase of nearly 70 percent,” said Veletzos, principal and consulting actuary with Mercer's Retirement, Risk and Finance Business. “These plans are poorly funded and more material compared to the size of the corporations, so pension risk is a major issue for these organizations.”
Veletzos also said that sponsors have grimly accepted the reality of a drop in asset returns in the forseeable future.
“The median expected return declined from 7.92 percent to 7.73 percent at year-end 2011, likely due to a gradual movement away from higher risk assets, such as equities, combined with lower expectations of future market returns,” he said.
Overall, the situation has changed the business from one of optimistic and strategic investment to preventing more collateral damage, explains Jacques Goulet, senior partner and US leader of Mercer's Retirement, Risk and Finance business.
“Pension risk management has become a top priority for many plan sponsors," he said. "Sponsors that have employed strategies to control market fluctuations in funded status through dynamic investment policies, liability-driven investing and other risk management strategies have seen a decline in funded status volatility."
Goulet said the result has been some proactive self-rescue attempts.
"Furthermore, we are seeing increased interest in risk transfer strategies, such as lump-sum cash-outs and annuitization, as ways to manage pension risk,” he said.