By Michael Katz
A new report from
consultancy group Mercer pegs the aggregate funding rate of pension plans
sponsored by S&P 1500 companies at 82% as of the end of January,
which was little changed from the previous month.
At month’s end, the estimated aggregate deficit decreased to
$400 billion from $408 billion as of the end of December 2016, according to the
report. Standard discount rates for pension plans, as measured by the Mercer
Yield Curve, remained flat in January at 4.04%, while the S&P 500 index rose
1.8%, and the MSCI EAFE index gained 2.9% during the month.
According to Mercer, the estimated aggregate value of
pension plan assets of the S&P 1500 companies at the end of 2016 amounted
to $1.81 trillion, compared with estimated aggregate liabilities of $2.21
“January is another reminder that equity returns alone will
likely not improve the funded status of pension plans,” said Jim Ritchie, a
partner in Mercer’s retirement business.
Many pension plans have large exposures to fixed-income
assets with durations much shorter than the liabilities, said Ritchie. As a result, they’re essentially
betting that interest rates will rise over the long term.
“While most pundits believe interest rates will go up in the
long run,” said Ritchie, “it is the short run that creates havoc on plan
sponsors’ balance sheets and income statements.”