(January 3, 2013) — There seems to be no end in sight for soaring pension deficits.
The aggregate deficit in pension plans sponsored by S&P 1500 companies has increased by $73 billion to a record year-end high of $557 billion as of December 31 2012, according to consulting firm Mercer.
This deficit compares to an aggregate pension deficit of $484 billion on December 31, 2011.
Despite overall positive annual asset growth of approximately 16% in the broad US equity market, falling interest rates have continued to pummel the funding status of pension plans. “Despite US and non-US equity indices outperforming expectations, interest rates on high quality corporate bonds declined by more than 80 basis points in the calendar year, driving discount rates down and plan liabilities up significantly, with the overall result a significant decline in funded status for most plans,” said Jonathan Barry, a partner with Mercer’s retirement consulting group, in a statement. “We also saw wide fluctuations in funded status through the year – with the aggregate funded status peaking at about 82% at the end of March, and hitting a low of 70% at the end of July – the largest month-end deficit we have seen since we began tracking this information.”
Richard McEvoy, leader of Mercer’s Financial Strategy Group, added that he sees an increasing number of pension plan sponsors seeking to lower the impact of defined benefit pension volatility on their balance sheets and cash funding requirements. “In 2013, we saw some landmark transactions in the risk transfer space, with Verizon, General Motors and Ford announcing various combinations of annuity purchase and participant lump sum offerings as a means of eliminating some plan liabilities. We anticipate this trend will continue in 2013 and beyond, as corporate defined benefit plan sponsors are becoming more focused on risk management issues and many are poised to make significant changes.”
It’s not only US-based pension plans breaking the worst kind of records. In June, the Pension Protection Fund (PPF), the lifeboat for bankrupt company funds in the UK, said the combined deficit across the industry had ballooned from £216.8 billion at the end of April to £312.1 billion at the end of last May. A year earlier the deficit was £24.5 billion. In a report to accompany the figures, the PPF said: “Over the month, 15 year gilt yields fell by 55 basis points, which resulted in liabilities increasing by 7.6%. The large rise in gilt prices offset nearly all the deterioration in equity markets, with assets falling by only 0.1%. Over the year to May 2012, 15-year gilt yields were down by 173 basis points and the FTSE All-Share Index fell by 11.3%.”
Gilt yields have been forced down in the UK, mainly due to the Bank of England’s Quantitative Easing program.