Pension plans sponsored by S&P 1500 companies finished 2012 with the highest year-end deficit ever. The aggregate deficit for these plans grew to $557 billion as of December 31, up from $484 billion at the end of 2011.
The overall funded ratio for these plans also declined slightly, down 1% from the 75% ratio seen at the end of 2011.
“Despite U.S. and non-U.S. 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.
The funded status deficit would have been worse if not for the estimated $60 billion in expected 2012 contributions made by these companies.
“We see a growing number of pension plan sponsors seeking to reduce the effect of defined benefit pension volatility on their balance sheets and cash funding requirements,” said Richard McEvoy, leader of Mercer’s financial strategy group.
“In 2012, we saw some landmark transactions in the risk transfer space, with Verizon, General Motors and Ford announcing various combinations of annuity purchase and participant lump sum offerings as a means of eliminating some plan liabilities. We anticipate this trend will continue in 2013 and beyond, as corporate defined benefit plan sponsors are becoming more focused on risk-management issues and many are poised to make significant changes.”