US Pension Deficits Near Record High

(July 13, 2010) —  A new report released by Mercer shows that pension deficits at S&P1500 companies hit $451 billion at the end of June, $1 billion short of the record high set in mid-January 2009.

The report revealed the funding ratio of S&P 1500 companies dropped five percentage points to 73% in June compared to 78% at the end of May, spurred by concurrently falling interest rates and equity values, which increased the combined deficit by $115 billion. The 2009 year-end deficit was $247 billion, corresponding to a funded status of 84%.

“On average plan sponsors still have a majority of their assets invested in equities, so the 5.4% fall in equity values over the last month has adversely affected plan assets,” said Adrian Hartshorn, Mercer financial strategy group partner. “Additionally, AA bond yields have also declined by about 40 basis points since the end of May increasing the value of plan liabilities.”

“We expect more plan sponsors to consider the impact their pension plan has on their underlying business and consider ways in which risk can be managed,” Hartshorn added in a statement.

The survey additionally indicated that larger pension deficits will result in a higher amount of pension contributions in 2011 for most plans under the funding rules of the Pension Protection Act.

Separately, figures released last months revealed the deficit of Pension Protection Fund (PPF)-eligible defined benefit schemes in the UK widened to £41.5 billion at the end of May from a deficit of just £2 billion at the end of April. Yet, scheme funding is better than it was a year previously, when combined deficit stood at £179 billion.

“Scheme managers will be praying the dream scenario of rising assets and falling liabilities is round the corner,” Sarah Abraham, consultant and actuary at Aon Consulting, said to IPE.com. “Until then, deficits look set to remain huge by historical standards.”