S&P 500 Pension Underfunding Hits Record Levels

(July 18, 2012) — It seems that corporate plan sponsors may have needed last month’s regulatory reform more than previously suspected.

S&P 500 corporations were underfunded by a daunting $578 billion in 2011, the highest level ever recorded, according to a report released by S&P Dow Jones Indices. Overall, the increase in liabilities left the average S&P 500 corporation with a 70.5% funded ratio.

Despite the gloomy data, S&P Dow Jones Indices struck an optimistic note. “Companies are continuing the trend of moving away from pension obligations and into 401 types of investments as they shift the responsibility of retirement away from the corporation and over to the individual,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices and author of the annual report. “Despite the record underfunding level, both pensions and OPEB have, in aggregate, become a manageable expense as cash levels remain at near record highs and cash-flows at an all-time high.”

The report found that the pension obligations of S&P 500 companies in fiscal year 2011 were underfunded by $355 billion, a jump of more than $100 billion from the year before and a significant spike over the previous record level of $308 billion in 2008. The underfunded status of other post employment benefits (OPEB)—typically comprised of health care obligations—also grew from $210 billion in fiscal 2010 to $223 billion.

Last month’s reform by Congress eased the pressure on corporate pension plans by relaxing their funding requirements. Instead of pegging the discount rate that pensions use to calculate liabilities to the 24-month average of corporate bond rates, plans were allowed to utilize a rate based on the 25-year average of corporate bond yields. Because the latter is higher than the former, the reform in theory shrank corporate liabilities and thereby granted corporations some breathing room with their pension plans.

To access the S&P report, click here.