US, UK Corporate Pension Deficits Widen Due to Falling Equity Markets

Rising discount rates were not enough to offset markets spooked in October by surging COVID-19 cases.

Declining equity markets increased the aggregate deficit of pension plans sponsored by S&P 1500 companies by $8 billion to an estimated $441 billion in October as their aggregate funding level dropped by 1 percentage point to reach 82%, according to consulting firm Mercer.

The funding level would have decreased further had the equity losses not been partially offset by a rise in discount rates. The S&P 500 index and the MSCI EAFE index decreased 2.77% and 4.06%, respectively, during the month, while discount rates for pension plans increased to 2.64% from 2.53%.

“GDP [gross domestic product] grew over 7% in the third quarter, but we saw equity markets sell off late in the month due to new COVID-19 cases rising rapidly and uncertainty with respect to the US presidential election,” Matt McDaniel, a partner in Mercer’s wealth business, said in a statement.  “A few months ago, additional pension funding relief, which could help mitigate a potential end-of-year market slide, looked promising. However, additional relief looks less likely now.”

The estimated aggregate value of S&P 1500 company pension plan assets declined in October to $2.03 trillion from $2.06 trillion at the end of September, while liabilities dropped to $2.47 trillion from $2.5 trillion.

Mercer’s estimates are based on each S&P 1500 company’s most recent available year-end statement, and by projections to Oct. 31 in line with financial indexes. The estimates include US domestic qualified and nonqualified plans, along with all non-domestic plans.

Meanwhile, Mercer’s Pensions Risk Survey showed that aggregate UK workplace pension plan deficits of the 350 largest companies listed on the FTSE grew by £2 billion ($2.59 billion) to £75 billion in October as the country faced a second lockdown due to the COVID-19 pandemic.

Liability values fell during the month to £871 billion at the end of October from £877 billion at the end of September, while asset values declined to £796 billion from £804 billion the previous month.

“COVID-19 storm clouds are gathering again as markets prepare for a second wave of coronavirus and the impact wide-ranging lockdowns will have on global economic growth,” Charles Cowling, Mercer’s chief actuary, said in a statement, noting that the most recent data from the UK’s Office of National Statistics shows the country’s economy is growing slower than expected and remains 9.2% below its pre-pandemic peak.

Cowling added that “various political uncertainties caused by the forthcoming US presidential election and Brexit negotiations indicate further risk for pension trustees at a time when many employers are facing challenges and covenants are under big pressure.”

He urged trustees to monitor their situation and seek opportunities to reduce risk where possible.

Mercer’s Pensions Risk Survey data relates to about 50% of all UK pension plan liabilities, with analysis focused on pension deficits calculated using the approach companies have to adopt for their corporate accounts.

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