US Pension Plan Deficit at End-September Reaches a Post-World War II High, According to Mercer Analysis

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Funding levels plummet during the month as equities values dropped and bond yields fell

NEW YORK--(BUSINESS WIRE)-- The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $134 billion during September, from a deficit of approximately $378 billion as of August 31, 2011, to $512 billion as of September 30, according to new figures from Mercer¹. This deficit corresponds to an aggregate funded ratio of 72% as of September 30, compared to a funded ratio of 79% at August 31, 2011 and 81% at December 31, 2010. Mercer believes that the end-of-month pension funding levels for the S&P 1500 are at a post-World War II low. The previous low point for funding was August 31, 2010 when the aggregate funded ratio was 71% but the deficit at that point of $507 billion has grown as liabilities have increased.

The decline in funded status was driven by a 7.0% drop in equities, and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical US pension plan decreased approximately 30-40 basis points during the month. Mercer’s analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 16% decline.

“The end of September marks the largest deficit since we have been tracking this information,” said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business. “Over the past 3 months, we have seen nearly $300 billion of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organizations with September 30 fiscal and/or plan year ends.

“With no expectation for a quick recovery, plan sponsors should evaluate the effects of the recent turmoil on their future cash requirements, as well as the impact on their P&L and balance sheet,” said Mr. Barry. “For some sponsors, the recent drop could result in falling below certain funding level thresholds under PPA which could lead to restrictions on lump sum payments and at the more extreme end, could result in a total freeze of benefit accruals.”

“The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives,” said Kevin Armant, a principal with Mercer’s Financial Strategy Group. “Those that were aware of the risks and can deal with the increased cash funding and P&L charges associated with the current market downturn may choose to stay the course. Those that can’t will continue to evaluate risk reduction opportunities, including increasing interest rate hedging programs, moving more into long corporate bond allocations or transferring risk through the introduction of a lump sum payment option or purchasing annuities. For both types of organizations, it’s likely that additional cash funding will be required and it may be useful to look at the option of accelerating those contributions, as some sponsors may have the capacity to take advantage of the low interest rate environment by borrowing to fund.”

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 statements² adjusted from each company’s financial year end to September 30 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, 2010, was $1.37 trillion, compared with estimated aggregate liabilities of $1.68 trillion. Allowing for changes in financial markets though the end of September 2011, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.31 trillion, compared with the estimated aggregate liabilities of $1.83 trillion as of September 30, 2011.

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, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues by designing, implementing and administering health, retirement and other benefit programs. Mercer’s investment services include investment consulting, implemented consulting and multi-manager investment management. Mercer’s 20,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York and Chicago stock exchanges. For more information, visit www.mercer.com.

Sample Data Points:
Date	High Quality Corporate Bond Yield	S&P 500 Index
December 31, 2007	6.40%	1,468.36
June 30, 2008	6.97%	1,280.00
December 31, 2008	6.34%	903.25
June 30, 2009	6.79%	919.32
December 31, 2009	5.98%	1,115.10
June 30, 2010	5.33%	1,030.71
December 31, 2010	5.33%	1257.64
March 31, 2011	5.49%	1325.83
June 30, 2011	5.40%	1320.64
July 31, 2011	5.09%	1292.28
August 31, 2011	5.02%	1218.89
September 30, 2011	4.71%	1131.42