August 6, 2013

S&P 1500 Pension Plan Funding at Highest Point Since 2008

Deficits are big, but nowhere near where they once were

Constant talk of underfunded pensions and municipal bankruptcies does little to quell anxiety in the topsy-turvy market, but a new report from research and consulting firm Mercer could lessen fears.

It finds funding levels of pension plans sponsored by S&P 1500 companies continued a strong rebound in 2013, with the aggregate deficit decreasing by $10 billion during the month of July to $212 billion. While deficits in the billions might seem worrisome, it’s actually the lowest level since the economic crisis first hit in 2008.

Equity markets staged a strong performance during the month with the S&P 500 index rising 5.1%. However, discount rates dropped back slightly in July after sharp increases in May and June, dampening the improvement slightly.

According to Mercer analysis, an estimated 17% of plan sponsors had assets in excess of their pension obligations as of July 31, compared to only 4% at Dec. 31, 2012. Mercer also estimates that if discount rates rose another 1%, the number of sponsors with fully funded pension obligations could exceed 40%.

“So far, plan sponsors are having a great year in terms of funded status improvement,” Jonathan Barry, a partner in Mercer’s Retirement consulting group, said in a statement.  “As a result, many sponsors are beginning to take preparatory steps not only in terms of asset allocation changes but also in preparing for pension buyouts and cash outs that entail a series of transition, legal and administrative steps. Sponsors don’t want to be caught napping as these opportunities arise“

The estimated aggregate value of pension plan assets of the S&P 1500 companies as of Dec. 31, 2012, was $1.59 trillion, compared with estimated aggregate liabilities of $2.14 trillion. Allowing for changes in financial markets through July 31, 2013, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.76 trillion, compared with the estimated aggregate liabilities of $1.98 trillion.

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Check out The Hunt for a Pension Crisis Fix at ThinkAdvisor.

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