The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $73 billion during August, from a deficit of about $305 billion as of July 31 to $378 billion as of August 31, according to new figures from Mercer.
This deficit corresponds to an aggregate funded ratio of 79% as of August 31, compared to a funded ratio of 83% at July 31 and 81% at December 31, 2010.
The decline in funded status was driven by a 5.4% drop in equities and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical US pension plan decreased by about 7 to 9 basis points during the month. Mercers analysis indicates the S&P 1500 funded status peaked at 88% at the end of April and has since seen a 9% decline.
August was a wild ride, says Jonathan Barry, a partner with Mercers Retirement Risk and Finance Group. We saw funded status plummet on August 8 due to the sharp fall in equity markets and declining Treasury yields, and a lot of ups and downs over the subsequent weeks. A small rally in equities in the last week of August, combined with widening credit spreads on corporate debt, provide some recovery from the early losses, but overall, the outcome was still bad news for pension plans.
Despite what seems to be unprecedented market volatility, Mercers analysis indicates that funded status swings like this are not as unlikely as one might think, and plan sponsors should be prepared for continued volatility going forward.
For the typical pension plan invested 60% in equities and 40% in aggregate fixed income, the monthly volatility of funded status is between 3% and 4%. The decline in August shouldnt be seen as an outlier, and there is the potential for even more volatility prior to the end of the year, says Kevin Armant, a principal in Mercers Financial Strategy Group.
(CM)