Pension plans sponsored by S&P 1500 companies were dealt a severe blow in the first six trading days of August, with aggregate funded status decreasing by $191 billion to a total funding deficit of $496 billion, according to Mercer.
The figures represent an aggregate funded ratio of 73% as of the market close August 8 a 10% reduction in just six days from Mercers calculation of an 83% funded ratio as of July 31, and a 15% reduction from the peak funded status measured in April of 88%.
According to BNY Mellons figures, funded status in June fell nearly 5% to 83.6%.
The recent flight to quality is bad for pension plans on two counts reducing the value of their risky assets while increasing the market value of their pension debt, Mercer said in a statement.
The decline in funded status was driven by a 13% drop in equities and a fall in yields on high-quality corporate bonds during the first six trading days of the month, Mercer says. Discount rates also decreased.
What we are seeing is yet another perfect storm of equity losses combined with a drop in interest rates, similar to what we saw in 2000-01 and 2008, says Jonathan Barry, a partner in Mercers Retirement Risk and Finance group. The 73% funded ratio we saw at the end of the day on Monday is the lowest level since August 2010. While the drop in equity markets is getting most of the attention, it is important to realize that the 42 point drop in discount rates over the past six days is playing a major role in the decline.
Barry says the move in recent years by pension plans to rerisk their plans has helped some pensions to avoid some of the volatility.
(CG)