The funded status of U.S. pension plans declined by nearly $60 billion dollars since Dec. 31, 2011, according to Mercer.
Despite a 4% increase in U.S. equity markets in June, discount rates used to measure the pension liability fell by 24 to 32 basis points during the month, and the yield curve hit an all time low for the second consecutive month, due mainly to the Moodys bank credit downgrade last month. Since many banks lost their AA ratings, they are now excluded from yield curves that set pension accounting discount rates.
In May, BNY Mellon reported that the funded status of a typical U.S. fund had hit a record low of 68.9%. The aggregate deficit in pension plans is now $543 billion, Mercer says, up from $484 billion at the end of 2011.
The Highway and Student Loan bill recently passed by Congress, however, could provide some relief, according to Mercer. It will reduce the corporate plan funding requirements by creating a corridor around the 25-year average of interest rates used to determine liabilities in the calculation of minimum contribution, giving funds time to improve funding levels and avoid restrictions on their ability to pay some accelerated benefit forms.
While these lower near-term contribution requirements will, rightly, be welcomed by many plan sponsors, the reduction in funding could lower overall funded status of U.S. pension plans in the short term, says Jonathan Barry, a partner in Mercers Retirement Risk and Finance division.
The reductions could reach $40 to $50 billion for S&P 1500 plan sponsors in 2012, possibly doubling to more than $100 billion in 2014, Mercer estimates.
All things being equal, that reduction in funding will reduce overall funded status from what it would otherwise have been had funding stabilization not been passed, says Barry. We suggest that plan sponsors take the opportunity to review their pension contributions in light of both the new rules and their broader pension risk management framework. The increase in PBGC premiums that come with the new legislation certainly give sponsors an incentive to keep their plans well funded.
The estimated aggregate value of pension plan assets of the S&P 1500 companies at Dec. 31, 2011, was $1.45 trillion compared with estimated aggregate liabilities of $1.93 trillion, Mercer says. As of June, the numbers grew to $1.55 trillion and $2.09 trillion, respectively.
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