Large plan sponsors finish 2012 with record deficit, Mercer reports

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 December 31, 2012, according to Mercer.

While the December 31, 2012 funded ratio of 74% rebounded from a record low of 70% as of July 31, 2012, overall the ratio declined from the 75% funded ratio seen at December 31, 2011, Mercer reports. 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.

Falling rates to blame

“Despite US and non-US 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% at the end of March, and hitting a low of 70% at the end of July – the largest month-end deficit we have seen since we began tracking this information,” Barry added.

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 P&L expense, and decreased earnings in 2013,” he added.

Source: Mercer press release, January 3, 2013.

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

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