2012 looks to be another challenging year: Mercer report

The overall financial health of defined benefit (DB) pension plans declined in 2011 and 2012 is shaping up as another challenging year, according to a new report released by Mercer. The report, “How Does Your Retirement Program Stack Up? – 2012″ found that the funded status of pension plans sponsored by companies in the S&P 1500 declined from 81% on December 31, 2010, to 75% on December 31, 2011. Funded status continued to decline in 2012, as these plans hit a record low of 70% as of July 31, representing a shortfall of $689 billion. Mercer based its analysis primarily on information contained in the 10-K reports filed by the companies in the S&P 1500 for the 2011 fiscal year.

“While large U.S. corporations contributed over $70 billion to their defined benefit plans in 2011, the overall funding deficits at year-end 2011 reverted to 2009 levels,” said Eric Veletzos, principal and consulting actuary with Mercer’s Retirement, Risk & Finance business, and the study’s primary author. “Liability growth exceeded asset returns for the fourth consecutive year, offsetting these contributions.”

Asset returns

The median asset return for 2011 was 2.9%, down from 12.1% in 2010 and 18.5% in 2009, the report found. Meanwhile, the median pension liability grew by 13.7% in 2011, the third consecutive year with liability growth in excess of 10%. The high liability rate of growth is driven by decreasing interest rates. As of June 30, 2012, asset returns have declined even more, in part driven by the uncertain economic outlook, the European sovereign debt crisis and downgrades of credit ratings of several major global financial institutions.

“The prevalence of ‘risky’ plans among S&P 1500 companies increased from 4.7% during 2010 to 7.1% during 2011, an increase of nearly 70%,” said Veletzos. “These plans are poorly funded and more material compared to the size of the corporations, so pension risk is a major issue for these organizations.”

“We have also seen a continued decline in sponsors’ expectations of asset returns for the future,” he continued. “The median expected return declined from 7.92% to 7.73% at year-end 2011, likely due to a gradual movement away from higher risk assets, such as equities, combined with lower expectations of future market returns.”

Jacques Goulet, senior partner and US leader of Mercer’s Retirement, Risk & Finance business, noted that “pension risk management has become a top priority for many plan sponsors.”

“Sponsors that have employed strategies to control market fluctuations in funded status through dynamic investment policies, liability-driven investing and other risk management strategies have seen a decline in funded status volatility. Furthermore, we are seeing increased interest in risk transfer strategies, such as lump-sum cash-outs and annuitization, as ways to manage pension risk,” Goulet added.

Source: Mercer press release, August 27, 2012.

For more information, visit http://www.wolterskluwerlb.com/rbcs.

For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer’s Benefits Reports.

Visit our News Library to read more news stories.