(August 3, 2012) — Corporate pension funds are breaking all the wrong records.
The aggregate deficit for S&P 1500 companies’ pensions hit a new high of $689 billion in July, while the funding ratio dipped to a new low of 70%, according to new figures from investment consultancy Mercer. In just one month, from June 30 to July 31, the deficit rose 27% and the average funding ratio dropped 4%.
“This record deficit proves that pension funded status volatility is showing no sign of abating, breaking the previous low of 71% at the end of September 2011,” said Jonathan Barry, a partner with Mercer’s Retirement, Risk & Finance group, in a statement. “As we have turned past the halfway point for the year, sponsors really need to take a close look at how these deficits might impact their 2013 financials. Absent a significant rise in rates over the next five months, sponsors will be looking at higher year-end balance sheet deficits and P&L expense for 2013.”
Discount rates fell between 30 and 55 basis points during July, based on Mercer’s pensions discount yield curve, resulting in a 3% to 11% jump in liabilities, according to the consultancy. Yields for high-quality corporate bonds have fallen steadily since 2008, when they hovered near an average of 7%, and now sit at 3.48%.
One principal with Mercer, Kevin Armant, urged a corporate plan sponsors to have a realistic and informed perspective on the ballooning deficits. Sponsors, he said, “need to take a close look at the impact of market conditions and recent legislative changes on their funding strategy.” In June, Congress relaxed funding requirements for corporate defined benefit plans while also raising the premiums plans owe to the Pension Benefit Guaranty Corporation. Plans will now be able to calculate liabilities using a discount rate based on a slightly modified 25-year average of corporate bond yields, as opposed to a 24-month average. This change will reduce corporation’s required contributions while yields remain extremely low.
“Companies need to also consider the true economic deficit they are now facing,” Armant said. Corporations “may want to contribute more than is now required in order to help address this record deficit.”