The funded status of the top U.S. pension plans came back full force in the first half of 2013, according to analysis from Mercer, and industry insiders are hoping plan sponsors will do what is necessary to reduce their balance sheet risk by the end of the year.
The overall funded status of the S&P 1500 pension plans was down at the end of 2012 and 2011. Assets performed well in 2012, returning a median 12.2 percent, and plan sponsors and participants contributed $81 billion to their plans. But it still wasn’t enough to improve the funded status because of record low discount rates, which dropped to 4 percent, Mercer said.
The average funded status for S&P 1500 plans was 75 percent in 2011 and 72 percent in 2012.
But funded status has come roaring back thus far in 2013, standing at 86 percent at the end of May.
Despite this year’s run-ups, pension volatility remains top of mind for plan sponsors. U.S. companies are looking at multiple strategies, including investment allocation, lump-sum programs and annuity buyouts to manage pension risk.
“The number of pension plans posing material balance sheet risks rose in 2012, as strong asset performance coupled with high contributions from plan sponsors wasn’t enough to offset declining discount rates,” said Eric Veletzos, a principal in Mercer’s Retirement business. “The question at hand for 2013 is whether plan sponsors are positioned to capitalize on the dramatic funded status improvement we have seen so far this year and make moves to reduce the balance sheet risk by the time year-end 2013 rolls around.”
He added that Mercer believes sponsors need to develop and implement comprehensive pension financial management strategies that incorporate both risk-retention and risk-transfer components to deal effectively with their pension risks.
According to Mercer, the number of pension plans posing material balance-sheet risks at U.S. organizations has risen over the past few years, from 4 percent in 2010 to 9 percent in 2012. Risky plans have a funded status of less than 75 percent and a pension liability greater than 40 percent of market capitalization.
More plan sponsors are considering risk management strategies to reduce the funded status volatility of their plans, including transferring the risk to employees via cash outs or insurers via buyouts.