With Market Uncertainty Over Debt Ceiling, US Pension Funding Dips in July

(August 4, 2011) — New figures from Mercer show that the aggregate deficit of S&P 1500 pension plans increased by $74 billion in July.

“I think the market’s concern around the US debt ceiling debate really showed up in this month’s numbers,” Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance group, said in a statement. “The S&P 1500 declined by roughly 4% in the last week of the month, and high quality bond yields declined, as investors looked for safer investments due to the uncertainty. We saw pretty steady improvement in funded status through the first few months of 2011, but we have seen more volatility the past three months, which has wiped out much of the improvement we saw in funded status year to date.”

He added: “We continue to recommend that plan sponsors, especially those with closed or frozen plans look into frequent funded status monitoring, in order to capitalize on funded status improvements, and move to lower risk positions.”

According to the consulting firm, the drop in funded status was fueled by a 2% decline in equities. Mercer’s analysis indicated the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 5% decline.

The debt ceiling debate has been a topic of growing concern in recent weeks. Earlier this week, Pacific Investment Management Co.’s (PIMCO) Mohammed El-Erian said that while a potential debt ceiling deal in Washington may forestall a default and a credit downgrade, it won’t fix the root of the problem draining the US economy.

“The key issue…is that we simply cannot generate enough growth to get us over all these issues,” El-Erian, PIMCO’s co-CEO, said in an interview with CNBC. “Therefore, we have these structural headwinds that continue to slow us down. Until we see structural solutions we’re going to be stuck on the bumpy road to a new normal.”

El-Erian asserted that in the near-term, the deal could avert a debt downgrade threatened by ratings agencies, such as Moody’s and Standard & Poor’s. Earlier this month, Moody’s cautioned that it would slash the US’ AAA credit rating if the government misses debt payments. It noted that because lawmakers have acted to increase the debt ceiling, it had not previously considered the situation high-risk.