Corporate Pensions Finished 2012 with Highest-Ever Deficits

By SHRM Online staff Jan 10, 2013

The aggregate deficit in pension plans sponsored by large U.S. companies (the S&P 1500) increased by $73 billion to a record year-end high of $557 billion as of Dec. 31 2012, according to HR consultancy Mercer. This compares to an aggregate pension deficit of $484 billion at year-end of 2011.

While the year-end 2012 funded ratio of 74 percent (assets to liabilities) rebounded from a record low of 70 percent as of July 31, 2012, overall the ratio declined from the slightly better 75 percent funded ratio seen at Dec. 31, 2011.

Despite overall positive annual asset growth of approximately 16 percent in the broad U.S. equity market in 2012, falling interest rates were once again the story, as discount rates used to calculate pension liabilities fell by over 80 basis points as compared to year-end 2011.

“Despite U.S. and non-U.S. equity indices outperforming expectations, interest rates on high-quality corporate bonds declined by more than 80 basis points in the calendar year, driving discount rates down and plan liabilities up significantly, with the overall result a significant decline in funded status for most plans,” said Jonathan Barry, a partner with Mercer’s retirement consulting group. “We also saw wide fluctuations in funded status through the year—with the aggregate funded status peaking at about 82 percent at the end of March, and hitting a low of 70 percent at the end of July—the largest month-end deficit we have seen since we began tracking this information.”

Increasing Cash Contributions

For companies with calendar year fiscal years, the year-end pension funding deficit is particularly important because it affects their reported balance sheet liabilities and subsequent year accounting expense, as well as the required cash contributions to the pension plan.

The funded status deficit would have been worse if not for the estimated $60 billion that companies disclosed they expected to contribute during 2012. “Many plan sponsors are merely treading water, or even moving backwards on funded status, despite significant cash contributions to their plans.” said Barry. “For many companies, a larger deficit will drive higher profit and loss (P&L) expense and decreased earnings in 2013.”

Reducing Balance Sheet Volatility

“We see a growing number of pension plan sponsors seeking to reduce the effect of defined benefit pension volatility on their balance sheets and cash funding requirements,” added Richard McEvoy, leader of Mercer’s financial strategy group, in the same release. “In 2013, we saw some landmark transactions in the risk transfer space, with Verizon, General Motors and Ford announcing various combinations of annuity purchase and participant lump-sum offerings as a means of eliminating some plan liabilities. We anticipate this trend will continue in 2013 and beyond, as corporate defined benefit plan sponsors are becoming more focused on risk management issues and many are poised to make significant changes.”


Source: Mercer, Dec. 31, 2012.

Related SHRM Articles:

Pension Plans’ Funded Status Declines Worldwide, SHRM Online Benefits, November 2012

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

A Lump-Sum Window Can Help ‘De-Risk’ a Pension Plan, SHRM Online Benefits, May 2011

Quick Links:

SHRM Online Benefits Page

SHRM Online Retirement Plans Resource Page

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