(February 3, 2012) — Large companies in the United States are facing a ‘challenging’ year despite seeing a reduction in their aggregate pension deficit in January, according to investment consulting firm Mercer.
The aggregate deficit in pension plans sponsored by S&P1500 companies fell by almost 11% from $484 billion to $431 billion in January, Mercer said today.
This represents an improvement in the funding ratio from 75% to 78%, however Mercer foresees obstacles ahead.
Kevin Armant, principal with Mercer’s Financial Strategy Group, said: “The coming year is shaping up to be a challenging one for pension plan sponsors. Over the past few weeks, we have seen many companies announce significant increases in planned contributions to pension plans, as they need to begin dealing with these deficits.
He added that Mercer expected to see additional announcements of large cash contributions to plans as companies file their I0Ks over the next few weeks. Armant said the company expected this to carry into 2013.
The improvement in funding ratio was due to positive equity performance in January, Mercer said. US markets, to which domestic plans have the largest equity exposure, were up 4.5% over the month while US fixed-income markets were up 1.5%.
However, interest rates on high quality corporate bonds, against which much of these companies’ pension liabilities are measured, also fell over the month as the market grew more confident of their relative quality. This meant that liabilities on some corporate schemes could have seen their discount rates fall by up to 20 basis points, according to Mercer.
Armant said: “It really highlights the level of interest rate risk that most US pension plans are exposed to. It appears that many plans are, in effect, making an implicit bet on interest rates rising, but with the recent announcements by the Fed, it is likely that we are looking at a low rate environment for the next few years.”
Last month the Pension Protection Fund, a lifeboat for bankrupt company schemes in the United Kingdom, announced the aggregate deficit on these funds had hit record highs at the end of December due to similar reasons US companies have faced.