Stable Funding Levels Will Lead to LDI and Risk Transfers, Says Mercer

S&P 1500 companies’ pension deficits are slowly shrinking, leading pension funds to consider ways to take advantage of the improved funding positions.

(November 4, 2013) — An equity rally and relative improvement in high-grade corporate bond yield rates, have led the biggest US corporates to sustained funding ratios at the end of October, prompting early discussions about pension risk transfers and liability-driven investing (LDI).

Data from consultants Mercer showed funding levels of pension plans sponsored by S&P 1500 companies remained stable during the month of October, with a funded ratio (assets divided by liabilities) of 91% at the end of the month.

This is equal to September’s figures, when it reached the highest level since October 2008. The total deficit of the S&P 1500 companies reached $185 billion at October 31, 2013, up slightly from $182 billion a month ago, but still a significant reduction from the estimated deficit of $557 billion at December 31, 2012.

Yields on high grade corporate bond rates (which are used to measure liabilities in the US) fell after congress passed the bill to raise the debt ceiling. The month ended with bond yields lower than the end of September, with the Mercer Yield Curve discount rate for mature pension plans falling from 4.58% to 4.45%, but still up 74 basis points year-to-date.

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“As we close in on year end for many sponsors, this funded status improvement is very encouraging,” said Jonathan Barry, a partner in Mercer’s retirement business.

“We are seeing many sponsors take advantage of this improvement as they plan to lessen the risk in their plan either through LDI or risk transfer strategies. We expect to see significant activity in these areas in 2014.”

Mercer isn’t the only one to be bullish about the US pension risk transfer market in the coming months: Glenn O’Brien, managing director of Prudential’s pension risk transfer business, told aiCIO the US was starting to see an increase in sponsors willing to transact.

“I was less optimistic [about the buyout market] at the beginning of the year, as companies were focusing on their year-end disclosures. But the macro-economic situation has improved and we’re starting to see a pick-up in interest in companies willing to deploy cash,” he said.