July Brings ‘Modest’ Pension Funding Recovery

After nearing record deficits at the end of June, U.S. pension plan funded positions have recovered modestly during July thanks mostly to rising equity markets, according to Mercer. 

A Mercer news release said the deficit in pension plans sponsored by S&P 1500 companies shrank by $20 billion to $431 billion at the end of July. Equity markets returned nearly 7% during the month, partially recovering from the 13% fall in equity prices during May and June, while interest rates used to measure pension liabilities fell slightly from last month. The end of July deficit corresponds to a funded status of 75%, compared to 73% at the end of June.

The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2009, was $1.25 trillion, compared with estimated aggregate liabilities of $1.50 trillion. Allowing for changes in financial markets though the end of July 2010, changes to the S&P 1500 constituents, and newly released financial disclosures, the estimated aggregate assets were $1.29 trillion, compared with the estimated value of the aggregate liabilities of $1.72 trillion.

Mercer pointed out that equity values have experienced significant volatility through most of 2010. “As we move into the third and fourth quarters of 2010, recent volatility makes plan sponsors acutely aware of the need to model year-end results, and their impact on plan costs for 2011, under several different scenarios,” said Gordon Young, the Integrated Retirement Financial Management business leader for Mercer in the U.S., in the news release.

In addition to equity volatility, there is concern over the level of the AA bond yield, which has declined to below 5.5% as of the end of July – only about 25 basis points higher than the lowest mark in the last decade for a mature plan. Because pension plan liabilities are valued using the AA bond yield, these lower values translate into higher plan obligations.