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Pension Plan Funding Hits Post-World War II Low
Funding levels plummet; stock values drop; bond yields fall

By Stephen Miller, CEBS  10/5/2011
 

In U.S. defined benefit pension plans sponsored by S&P 1500 companies, the aggregate funded ratio of assets to liabilities fell to 72 percent as of Sept. 30, 2011, compared to a funded ratio of 79 percent at Aug. 31, 2011, and 81 percent at Dec. 31, 2010, according to monthly figures from Mercer, an HR consultancy and outsourcing firm.

At the end of the third quarter of 2011, pension funding levels for the S&P 1500 hit a post-World War II low, according to Mercer. The firm's analysis indicates the funded status for S&P 1500 pension plans was 88 percent at the end of April 2011 and has since seen a 16 percentage point decline.

“The end of September marks the largest deficit since we have been tracking this information,” said Jonathan Barry, a partner in Mercer’s retirement risk and finance business. “Over the past three months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with September 30 fiscal and/or plan year ends."

With no expectation for a quick recovery, plan sponsors should evaluate the effects of the recent turmoil on their future cash requirements and the impact on their profit/loss and balance sheet statements, Barry advised. “For some sponsors, the recent drop could result in falling below certain funding level thresholds under the Pension Protection Act, which could lead to restrictions on lump sum payments and—at the more extreme end—could result in a total freeze of benefit accruals,” he noted.

Risk Management Strategy

“The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives,” added Kevin Armant, a principal with Mercer’s financial strategy group. “Those that are aware of the risks and can deal with the increased cash funding and profit/loss charges associated with the current market downturn may choose to stay the course. Those that can’t will continue to evaluate risk reduction opportunities," he said.

Likely risk reduction moves, Armant explained, include:

Increasing interest rate hedging programs.

Moving more into long corporate bond allocations.

Transferring risk through the introduction of a lump sum payment option or purchasing annuities.

In addition, "It’s likely that additional cash funding will be required, and it may be useful to look at the option of accelerating those contributions as some sponsors may have the capacity to take advantage of the low interest rate environment by borrowing to fund,” Armant pointed out.

Source: Mercer, Sept. 30, 2011.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related Articles: 

Six Ways to Reduce Pension Costs and Combat Volatility, SHRM Online Benefits Discipline, October 2011

More Pensions Using 'Alternative' Investments, SHRM Online Benefits Discipline, September 2011

Pension Volatility: How to React as Funding Forecasts Spike, SHRM Online Benefits Discipline, November 2010

Market Volatility Leads to Broader View of Pension Risks, SHRM Online Benefits Discipline, March 2010

Pension Tension: Seven Critical Questions Facing Plan Sponsors, SHRM Online Benefits Discipline, August 2009

Liability-Driven Investing Strategies Proved Worth, SHRM Online Benefits Discipline, February 2009

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