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EQUITY MARKET RALLY IN FEBRUARY DRIVES CONTINUED IMPROVEMENT IN PENSION PLANS FUNDED STATUS


By: 
Date: March 2 2012

New York, March 2, 2012
The aggregate deficit in pension plans sponsored by S&P 1500 companies was $410 billion at February 29, 2012, a decrease of $21 billion from January 31, 2012, according to new figures from Mercer[1]. This deficit corresponds to an aggregate funded ratio of 79% as of February 29, 2012 compared to a funded ratio of 78% as of January 31, 2012 and 75% at December 31, 2011.
 
The increase in funded status in February was primarily attributable to positive asset performance during the month. US equity markets were up over 4% for the month. Interest rates on high quality corporate bonds, which are used to measure the pension liability, fell seven basis points during the month.
 
“US pension plan funded status has gotten off to a good start in 2012.”, said Jonathan Barry, a partner in Mercer’s Retirement Risk and Finance business, “But before sponsors declare the pension crisis to be over it is important to realize we have had numerous examples over the past few years of funded status improvements quickly wiped out by market movements. We saw similar improvements in funded status between January and March 2011, but overall, US plans ended up down 6% for the year. This highlights the importance of plan sponsors having a plan in place to know when to take risk off the table, and having the governance structure in place to be able to react quickly when the opportunity arises.“
 
Despite the improvement over the past two months, most plan sponsors will be required to contribute significantly higher amounts to their plans in 2012 in comparison to 2011 as funding requirements for most plan sponsors are based on average interest rates and smoothed asset returns. Thus, for purposes of the minimum funding rules, funded status is still trending downward as these smoothed funding measures catch up to the mark-to-market basis mandated for pension accounting.  “Plan sponsors in the S&P 1500 disclosed estimated 2011 contributions totaling $50B in their 10Ks issued last year,” said Craig Rosenthal, a partner in Mercer’s Retirement Risk and Finance business. “However, since that time we saw significant discretionary contributions from many plan sponsors in the latter half of 2011, which in large part were made to avoid benefit restrictions under the Pension Protection Act of 2006 (PPA). We expect the contribution amounts that will be disclosed in the upcoming 10K filings to be made in 2012 will be significantly higher than the $50B figure from last year. We currently anticipate that required contributions for 2012 will increase 30%-40% in aggregate, and we also expect many plan sponsors may choose to make additional contributions during 2012 to avoid the imposition of PPA’s benefit restriction requirements.”   
 
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[2] adjusted from each company’s financial year end to February 29 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 February 2012, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.54 trillion, compared with the estimated aggregate liabilities of $1.95 trillion as of February 29, 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
 

Figure 1.
Source: Mercer, February 29, 2012
 
Figure 2: Sample Data Points:
Date
High Quality Corporate Bond Yield[3]
S&P 500 Index[4]
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%
1,257.64
March 31, 2011
5.49%
1,325.83
June 30, 2011
5.40%
1,320.64
September 30, 2011
4.71%
1,131.42
December 31, 2011
4.55%
1,257.60
February 29, 2012
4.44%
1,365.68
 
 
 
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.
 
 


[1]Figures provided by Mercer Investment Consulting, Inc.
 
[2]Source of Financial Statement Data: Standard & Poor’s Capital IQ. Standard and Poor’s is a division of The McGraw-Hill Companies, Inc.
[3]Assumed duration of approximately 11 years. Based on Mercer Yield Curve Mature Plan Index rate.
[4]Includes price changes only; total returns also include dividends.



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