S&P 1500 DB Plan Funding Decreases Again

The estimated funded level of defined benefit (DB) plans sponsored by S&P 1500 companies fell another 1% in April to 84%, according to Mercer.

Equity market gains were not enough to offset the liability growth of pension plan sponsors in the S&P 1500, Mercer says. The collective deficit of $360 billion as of April 30 is up $28 billion from the estimated deficit of $332 billion as of March 31, and up $257 billion from the beginning of the year.

U.S. equity markets earned about 0.6% during April based on the S&P 500 Index. The Mercer Yield Curve discount rate for mature pension plans was down 11 basis points to 4.17%, its lowest point in almost a year, driving liabilities upward.

“Long-term interest rates continue to decline in 2014, taking away about half of the improvements that we saw in 2013,” says Jim Ritchie, a principal in Mercer’s retirement business, based in New York. “While many plan sponsors and investment analysts expect interest rates to rise in the future, any decreases in long-term rates over a short period of time can be very disruptive to plan sponsors. The first few months of the year are a stark reminder of how quickly pension gains can be erased.”

Ritchie notes, “Plan sponsors who have implemented risk management strategies, such as glide path policies or risk transfer programs, are faring much better this year than those sponsors who did not implement such strategies.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to April 30, 2014, in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all nondomestic plans.

Information about the Mercer Yield Curve can be found here.