Administration January 6, 2015

Funding of S&P 1500 Plans Slipped 9% in 2014

Low interest rates and new mortality tables overpowered the year’s positive asset returns, resulting in a 9% decline in funding for Standard & Poor’s (S&P) 1500 companies, according to data from Mercer. 
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The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies dipped, from 88% as of December 31, 2013, to 79% as of December 31, 2014. Decreases in interest rates used to calculate corporate pension plan liabilities combined with an increase in liability to reflect improved longevity overpowered increases in equity and fixed-income markets, lowering funded status to 79%.

Mercer said it anticipates that most plan sponsors will adopt new mortality tables reflecting improved mortality projections, such as the ones published by the Society of Actuaries earlier this year, or industry-specific mortality tables developed by Mercer in 2014. The estimated aggregate deficit of $504 billion as of December 31, 2014 is more than double the $237 billion deficit seen at the beginning of the year, according to Mercer.

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The S&P 500 index rose by 11.4% during 2014, while MSCI EAFE index decreased by 7.4%. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 88 basis points to 3.81%.

According to Jim Ritchie, a principal in Mercer’s retirement business, 2013’s gains were effectively wiped out in 2014 by declining interest rates and improved mortality estimates despite the year’s solid returns in domestic equities. “The volatility over the last two years shows the benefit of sponsors having a comprehensive risk management strategy in place to mitigate these wide swings in funded status,” Ritchie said.

Efficient strategies include “glide path” investment policies that generally involve buying long-term bonds as funded status improves, as well as risk transfer exercises such as cash-out programs for former employees and annuity purchases for retiree groups, Ritchie said.

“The potential benefits of these risk transfer strategies are highlighted by the significant improvements in longevity seen from the new mortality studies in 2014,” Ritchie said. “We expect to see an uptick in both glide path adoption as well as risk transfer in 2015, as sponsors seek to mitigate the impact of this pension volatility on their balance sheet and P&L.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to December 31, 2014 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 as of December 31, 2013, was $1.80 trillion, compared with estimated aggregate liabilities of $2.03 trillion. Allowing for changes in financial markets through December 31, 2014, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of December the estimated aggregate assets were $1.89 trillion, compared with the estimated aggregate liabilities of $2.39 trillion. 

Administration January 6, 2015

Pension Fund Performance Suffered in December

The funded status of U.S. corporate pensions dropped to 87.3% in the last month of 2014, according to BNY Mellon ISSG.
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A year-end analysis from BNY Mellon Investment Strategy and Solutions Group (ISSG) finds corporate pension plans, public plans, foundations and endowments all finished 2014 on a weak note.

ISSG says the funded status of the typical U.S. corporate pension plan fell 2.6% to 87.3% in December, as assets fell and liabilities increased. Public defined benefit (DB) plans, endowments and foundations also lost ground during the month, ISSG notes.

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Assets decreased 0.4% for the typical corporate plan in December, as liabilities increased 2.5%. The funded status for the typical corporate plan finished 2014 down 7.9% from the December 2013 high of 95.2%, as described in the BNY Mellon Institutional Scorecard. 

ISSG suggests falling international and emerging markets equities accounted for the decline in assets at U.S. corporate plans and public plans, while the declines in private equity and commodities led to negative returns for foundations and endowments. Further, higher liabilities for corporate plans were propelled by a drop in the Aa corporate discount rate, which dropped 14 basis points (bps) to 4.00% over the month. As ISSG explains, plan liabilities are calculated using the yields of long-term investment grade bonds, so lower yields on these bonds result in higher liabilities over time. 

Andrew Wozniak, head of fiduciary solutions for ISSG, notes the decline in interest rates, with the Aa corporate discount rate falling 93 basis points during 2014, was the main driver for the fall in funded status during 2014. Asset gains simply could not keep up with the rise in liabilities, he suggests.

“The falling rates of 2014 erased almost all of the gains in funded status in 2013 that resulted from rising interest rates during that year,” Wozniak concludes.

Public defined benefit plans in December underperformed their targets by 1.8% as assets declined 1.2%, according to the monthly ISSG report. For the full year of 2014, public plans underperformed their return target by 3.0%. For endowments and foundations, the real return in December was negative 1.8% as assets declined 1.4%, ISSG says. For the year, endowments and foundations are behind their inflation plus spending target by 2.7%. 

The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon. More information can be found at www.bnymellon.com.

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