Last year was marked by a sharp decline in the average funded status of US pensions, with sources estimating they dropped anywhere from 6% to 12% from the end of 2010 to the end of 2011.
According to Mercer, the aggregate funded ratio of the pension plans sponsored by S&P 1500 companies was 75% at the end of 2011, compared to 81% at the end of 2010. That represents a deficit of $484 billion, an increase of $169 billion over the deficit at the end of the previous year.
Figures supplied by BNY Mellon Asset Management peg the funded status of the typical US pension fund at 72.4% at the end of 2011, a drop of more than 12% over the deficit at the end of 2010. BNY Mellon says it was the second-biggest calendar year decline since it began tracking such data in 2005.
The firms attribute the decrease in the funded statuses of pensions in the US to an increase in liabilities due to historically low discount rates, which reached 4.36% in 2011.
With US and non-US equity indices underperforming expectations and interest rates on high quality corporate bonds declining upwards of 100 basis points, driving discount rates down and plan liabilities up significantly, we saw a marked decline in funded status, says Jonathan Barry, a partner with Mercers Retirement Risk and Finance consulting group. We also saw wide fluctuations in funded status through the year with the aggregate funded status peaking at about 88% at the end of April, and hitting a low of 71% at the end of September the largest month-end deficit we have ever seen since we began tracking this information.
Mercer says that although the U.S. equity markets were up about 1% in 2011, with U.S. fixed income posting strong returns, less than 45% of pensions invest in fixed income, so the overall impact of double-digit growth in long maturity bonds for the year was minimal on pensions. BNY Mellon notes that assets for the typical plan did increase 2.7% in 2011, but liabilities increased more quickly at 20%, sending the funded status down for the year.
“The continuing uncertainty regarding the prospects for a U.S. economic recovery and the ongoing European debt crisis drove investors back into bonds during December, which sent interest rates lower,” said Jeffrey B. Saef, managing director of BNY Mellon Asset Management and head of the Investment Strategy & Solutions Group division of BNY Mellon. We expect continuing volatility until investors believe the recovery in the U.S. is sustainable and some resolution is reached in Europe.
The funded status deficit would have been worse if not for the estimated $50 billion that companies disclosed they expected to contribute during 2011, according to Mercer. The outlook looks grim for 2012 as well. Many plan sponsors are merely treading water, or even moving backwards on funded status, despite significant cash contributions to their plans Barry says. For many companies, the larger deficit will drive higher P&L expense, as well as large increases in pension funding requirements for 2012.
Mercer believes 2012 will be a tumultuous year for the pensions industry, with increased focus on governance, flexibility and tactical decision-making.
It was not a good year for hedge funds either, which had their second-worst year ever in 2011, according to some sources.
(CG)