S&P 1500 Pension Plans See Increase in Funded Status

The aggregate deficit in pension plans sponsored by S&P 1500 companies was $410 billion on February 29, 2012.

According to Mercer, this is a decrease of $21 billion from January 31, 2012. This deficit corresponds to an aggregate funded ratio of 79% as of February 29, 2012, compared with a funded ratio of 78% as of January 31, 2012 and 75% at December 31, 2011.

The increase in funded status in February was primarily attributable to positive asset performance during the month. U.S. equity markets were up more than 4% for the month. Interest rates on high-quality corporate bonds, which are used to measure the pension liability, fell seven basis points during the month.

“U.S. pension plan funded status has gotten off to a good start in 2012,” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business, “but before sponsors declare the pension crisis to be over, it is important to realize we have had numerous examples over the past few years of funded status improvements quickly wiped out by market movements. We saw similar improvements in funded status between January and March 2011, but overall, U.S. plans ended up down 6% for the year. This highlights the importance of plan sponsors having a plan in place to know when to take risk off the table, and having the governance structure in place to be able to react quickly when the opportunity arises.”



Despite the improvement over the past two months, most plan sponsors will be required to contribute significantly higher amounts to their plans in 2012 compared with 2011 as funding requirements for most plan sponsors are based on average interest rates and smoothed asset returns, Mercer said. Thus, for purposes of the minimum funding rules, funded status is still trending downward as these smoothed funding measures catch up to the mark-to-market basis mandated for pension accounting.   

“Plan sponsors in the S&P 1500 disclosed estimated 2011 contributions totaling $50B in their 10-Ks issued last year,” said Craig Rosenthal, a partner in Mercer’s Retirement Risk and Finance business. “However, since that time we saw significant discretionary contributions from many plan sponsors in the latter half of 2011, which in large part were made to avoid benefit restrictions under the Pension Protection Act of 2006 (PPA). We expect the contribution amounts that will be disclosed in the upcoming 10-K filings to be made in 2012 will be significantly higher than the $50B figure from last year. We currently anticipate that required contributions for 2012 will increase 30% to 40% in aggregate, and we also expect many plan sponsors may choose to make additional contributions during 2012 to avoid the imposition of PPA’s benefit restriction requirements.”