Mercer Shows S&P 1500 Pension Deficits Fall $14 Billion

(March 3, 2011) — Recent figures from Mercer show that the aggregate deficit in pension plans sponsored by S&P 1500 companies decreased by $14 billion during February.

“Despite the positive trend over the past six months, funded status has only improved marginally since this time last year,” said Kevin Armant a principal with Mercer’s Financial Strategy Group, in a statement. “There are still many plan sponsors waiting on the sidelines hoping for funded status improvements through high equity returns and further increases in interest rates.”

Armant added that he believes it is in the plan sponsor’s best interests to understand risk exposure, implementing a plan to manage those risks. “Consideration should be given to the company’s business objectives and fiduciary responsibilities with the understanding that equity market returns and interest rates may or may not perform as hoped,” he said.

According to Mercer, the deficit dropped from $270 billion on January 31 to $256 billion as of February 28, 2011, corresponding to an aggregate funded ratio of 85% as of February 28, compared to a funded ratio of 81% at December 31, 2010.

Separately, last month, Hymans Robertson’s “FTSE350 Pensions Indicator Report,” which examines the state of UK pension finances, found that the regulatory focus on filling scheme deficits quickly is “unhelpful,” warning that sponsors should resist the pressure to rush to ‘plug the hole’ until they have a clear de-risking strategy in place. “In our view, most schemes, and scheme sponsors, would benefit from a slower, more stable, approach to funding,” Clive Fortes, Head of Corporate Consulting at Hymans Robertson, stated in a release. “In this regard, the regulatory focus on speed of recovery is unhelpful and potentially damaging to businesses and to their pension schemes.”

Furthermore, according to the consultant firm, last year’s continued improvement in funding positions of FTSE350 schemes will increase the use of de-risking strategies in 2011. The report showed that scheme deficits fell significantly last year from £142 billion at the start of the year to a £109 billion deficit at year end. The decrease was largely a result of the switch from Retail Price Index to Consumer Price Index for scheme indexation, estimated to have cut deficits by £25 billion.

Hymans Robertson indicted that this anticipated upswing in de-risking activity by schemes is likely to focus on 1) investment strategy, 2) risk transfer, with an expected spike in the growth of risk transfer and buyout deals, and 3) liability management, as enhanced transfer offers and pension increase exchanges will continue to be attractive for many scheme sponsors.