Many plan sponsors are still having a hard time improving the funding status of their plans, according to indexes measuring the December funding levels of U.S. corporate pension plans. Statistics show plans’ funding rose slightly from November 2012 to December 2012, keeping the month’s funded ratios above the lowest monthly figures for 2012; however, they remained below those recorded at the end of 2011.
Among investment and pension plan consultants that closely monitor pension liabilities, human resources consultant firm Mercer reported that the aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $73 billion to a record year-end high of $557 billion as of Dec. 31, 2012. This deficit compares with an aggregate pension deficit of $484 billion on the same date a year earlier. While the S&P 1500’s Dec. 31, 2012, funded ratio of 74 percent rebounded from a record low of 70 percent at July 31, 2012, the ratio still stood below the 75-percent funded ratio on Dec. 31, 2011, Mercer said in a Jan. 3 press release.
Mercer estimates the aggregate funded-status position of plans operated by S&P 1500 companies on a monthly basis.
Despite overall annual asset growth of about 16 percent in the broad U.S. equity market, falling interest rates remained the bane of pension funding status, as discount rates fell by more than 80 basis points as compared with year-end 2011. For companies with calendar-based 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 to their defined benefit plans during 2012. “Many plan sponsors are merely treading water, or even moving backwards on funded status, despite significant cash contributions to their plans.” said Jonathan Barry, a partner with Mercer’s retirement consulting group. “For many companies, a larger deficit will drive higher [profit-and-loss] expense, and decreased earnings in 2013.”
Milliman 100 PFI Results
Another consulting firm that tracks pension liabilities, Milliman, said in a report that the funded status of the 100 DB plans in its Milliman 100 Pension Funding Index increased by $53.7 billion during December. The deficit decreased to $411.8 billion from a deficit of $465.5 billion at the end of November. The improvement for the month of December was due to lower liabilities based on an increase in corporate bond interest rates that are the benchmarks used to value pension liabilities.
The funded status increase was partially aided by positive investment performance during December, as was true for the Mercer index. As of Dec. 31, the funded ratio of the Milliman 100 PFI increased to 76.4 percent from 74.0 percent at the end of November. It finished well above the index’s historical low funded ratio of 70.5 percent set in May 2003.
December 2012’s $8 billion increase in market value brings the 100 PFI asset value to $1.336 trillion, up from $1.328 trillion at the end of November 2012, an investment gain of 0.8 percent for the month. Improvements in the December 2012 metrics may be attributable to higher-than-expected cash contributions, which will be disclosed as the 100 companies publish their annual Securities and Exchange Commission 10-K filings in the first quarter of 2013.
The Milliman 100 PFI projects the funded status for pension plans in the index using the actual reported asset values, liabilities and asset allocations of the companies’ pension plans.
BNY Mellon Report
A third firm that measures “typical” U.S. corporate pension plans’ funded status reported a rise in results for December but also posted a slight increase in this metric vs. December 2011.
The funded status of the pensions monitored by BNY Mellon’s Investment Strategies & Solutions Group increased 1.9 percentage points in December to 76.3 percent, according to a press release about the latest BNY Mellon Pension Summary Report. For the year, the funded status was up 1.0 percentage point, the Jan. 4 release said. Assets for the typical plan in December rose 0.9 percent as equities markets climbed. Liabilities fell 1.7 percent as the AA corporate discount rate rose 13 basis points to 3.89 percent, the report said. Plan liabilities are calculated using the yields of long-term investment-grade bonds; higher yields on these bonds result in lower liabilities.
The monthly indicator for typical corporate pension plans is produced by a unit of BNY Mellon, a global financial services company. BNY Mellon’s funding ratio tracker takes into account asset and liability returns as well as plans’ funding ratios, according to BNY Mellon.
Finding out More
To read the complete story on the December pension funding reports, click here.