(July 3, 2012) — Corporate pension underfunding in the United States grew markedly in the first half of 2012, and legislative relief offered by Congress could exacerbate pension deficits, consultancy Mercer has asserted.
The aggregate deficit facing pension plans sponsored by the S&P 1500 increased by $59 billion between December 31, 2011 and June 30, 2012, according to Mercer. The total figure at the end of June stood at $543 billion, representing a funded ratio of 74%, a drop from its previous ratio of 75% in December.
The funding issues stem less from ailing US equity markets, which bore respectable returns in June, but from falling discount rates that inflated liabilities. The drop in discount rates largely resulted from rating agency Moody’s action downgrading the credit rating of 15 major banks in late June. Many of those banks lost their AA credit ratings and consequently became excluded from yield curves used to set pension accounting discount rates.
Although applauded by plan sponsors and pension experts, the omnibus spending bill passed by Congress last week that relaxed funding requirements for corporate defined benefit plans will likewise aggravate underfunding. The bill will permit plans to employ a discount rate smoothed over a 25-year period instead of the current 24-month average. At the same time, Congress also upped the premiums that plans owe to the Pension Benefit Guaranty Corporation (PBGC).
“While these lower near-term contribution requirements will, rightly, be welcomed by many plan sponsors, the reduction in funding could lower overall funded status of US pension plans in the short term.” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business. “All things being equal, that reduction in funding will reduce overall funded status from what it would otherwise have been had funding stabilization not been passed. We suggest that plan sponsors take the opportunity to review their pension contributions in light of both the new rules and their broader pension risk management framework. The increase in PBGC premiums that come with the new legislation certainly gives sponsors an incentive to keep their plans well funded.”
US pension plans are not alone in wrestling with sizeable underfunding challenges. This week, Aon Hewitt announced that the pension liabilities of the 350 largest companies listed on the London Stock Exchange had reached their highest level ever relative to market capitalization.