(November 5, 2012) — S&P 1500 plan sponsors may face their highest year-end pension deficit, Mercer Investment Consulting has predicted, with a $607 billion deficit putting pressure on plan sponsors’ financials at year end and in 2013.
Deficit has grown by roughly $124 billion thus far in 2012, the consulting firm has revealed.
“We don’t have any expectations of significant changes in interest rates over the next 30 days, and equity markets could be volatile due to uncertainty around the fiscal cliff,” said Mercer’s Jonathan Barry a partner in Mercer’s Retirement Risk and Finance Group. “It is very likely that we will see these plans at the highest aggregate deficit since we have tracked this data. This will mean higher year end balance sheet deficits and P&L expense for 2013.”
According to Mercer, the deficit among S&P 1500 plan sponsors corresponds to an aggregate funded ratio of 72% as of November 30. Due to small equity gains and moderate increases in discount rates, funded ratios have rebounded slightly above the record low funded ratio of 70% seen at July 31, when the aggregate deficit was $689 billion. “However, with December 31 right around the corner, it is likely that a record end of year deficit will be recorded as 2012 closes,” Mercer stated. “The previous high for the year-end aggregate deficit was $484 billion on December 31, 2011.”
Mercer’s latest findings follow the firm’s similarly dismal August assessment that corporate pension funds finished July with record-high deficits and record-low funding ratios. “This record deficit proves that pension funded status volatility is showing no sign of abating, breaking the previous low of 71% at the end of September 2011,” Barry said at the time. “As we have turned past the halfway point for the year, sponsors really need to take a close look at how these deficits might impact their 2013 financials. Absent a significant rise in rates over the next five months, sponsors will be looking at higher year-end balance sheet deficits and P&L expense for 2013.”
Following the August results, one principal with Mercer, Kevin Armant, urged corporate plan sponsors to have a realistic and informed perspective on the ballooning deficits. Sponsors, he said, “need to take a close look at the impact of market conditions and recent legislative changes on their funding strategy.” In June, Congress relaxed funding requirements for corporate defined benefit plans while also raising the premiums plans owe to the Pension Benefit Guaranty Corporation. Plans will now be able to calculate liabilities using a discount rate based on a slightly modified 25-year average of corporate bond yields, as opposed to a 24-month average. This change will reduce corporation’s required contributions while yields remain extremely low.
Related video: The Best and Worst Pension Systems Worldwide.David Knox, a senior partner at Mercer, speaks about his latest ranking of global pension funds, and on what the US might learn from looking abroad.