United States , New York

The aggregate deficit in pension plans sponsored by S&P 1500 companies grew $80 billion in May to $488 billion, according to new figures from Mercer . This deficit corresponds to an aggregate funded ratio of 76% as of May 31 2012 compared to a funded ratio of 79% as of April 30, 2012, and just barely above the funded ratio from 75% at December 31, 2011. Effectively the funding gains achieved in the first three months of 2012 were wiped out by market trends in April and May.

The decrease in funded status in May was attributable to the falling equity markets as well as an increase in liabilities due to declining interest rates. Interest rates on high quality corporate bonds, which are used to measure the pension liability, fell 10-15 basis points during the month, as measured by the Mercer Pension Discount Yield Curve. The yield curve hit an all time low driving the aggregate S&P 1500 liability in excess of $2 trillion for the first time. US equity markets fell 6 percent during May as measured by the S&P 500 total return index. Plan sponsors who hedged their liability by holding a higher allocation in long duration bonds would have seen better asset performance during the month.

“We saw a big step backwards for most US pension plans in May which, on top of declines in April, essentially wiped out the positive performance we saw in the first quarter of the year,”  said Jonathan Barry, a partner in Mercer’ Retirement Risk and Finance business.   “It’s further proof of the significant volatility that most US plan sponsors are exposed to – in just the past two months we have seen a decline of $152 billion. However, those plan sponsors who have implemented risk management strategies have likely cushioned the blow. 

“Long duration fixed income portfolios have continued to perform well, moving in parallel with plan liabilities, and plan sponsors who have implemented risk transfer strategies, such as terminated vested cashouts have effectively taken equity and interest risk off the table for a portion of their plan liabilities, and have been less affected by the market downturn.” said Mr. Barry.

The incentive for defined benefit plan sponsors to address volatility risks was underscored by General Motors’ announcement on June 1 to transfer the pension volatility for most of the company’s salaried retirees, through a combination of voluntary lump sum offers and an annuity purchase by Prudential. Oliver Wyman and Mercer were appointed by State Street, the Independent Fiduciary for the General Motors plan, to act as its insurance advisor on the transaction.

“This is a landmark action,” said Sean Brennan, a principal in Mercer’s Financial Strategies Group. “For some time, we have anticipated that one of these large transactions would occur and would set a precedent. Many other sponsors of large plans have to be looking at this option.”

Mercer estimates the aggregate combined funded status position of plans operated by S&P 1500 companies on a monthly basis. Figure 1 shows the estimated aggregate surplus/(deficit) position and the funded status of all plans operated by companies in the S&P 1500. This is based on projections of their reported financial statements  adjusted from each company’s financial year end to May 31 in line with financial indices. This includes US domestic qualified and non-qualified plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2011, was $1.45 trillion, compared with estimated aggregate liabilities of $1.93 trillion. Allowing for changes in financial markets though the end of May 2012, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.52 trillion, compared with the estimated aggregate liabilities of $2.01 trillion as of May 31, 2012.

Notes for Editors
Unless otherwise stated, the calculations are based on the Financial Accounting Standard (FAS) funding position and include analysis of the S&P 1500 companies.

Information on the Mercer Yield Curve is available at: www.mercer.com/pensiondiscount

About Mercer
Mercer is a global leader in human resource consulting and related services. The firm works with clients to solve their most complex human capital issues by designing and helping manage health, retirement and other benefits. Mercer’s 20,000 employees are based in more than 40 countries. Mercer is a wholly-owned subsidiary of Marsh & McLennan Companies (NYSE: MMC), a global team of professional services companies offering clients advice and solutions in the areas of risk, strategy and human capital. With 52,000 employees worldwide and annual revenue exceeding $10 billion, Marsh & McLennan Companies is also the parent company of Marsh, a global leader in insurance broking and risk management; Guy Carpenter, a global leader in providing risk and reinsurance intermediary services; and Oliver Wyman, a global leader in management consulting. For more information, visit www.mercer.com. Follow Mercer on Twitter @MercerInsights