Funding of S&P 1500 Plans Unchanged in May

“Funded status took a bit of a breather in May following the big declines we saw through April,” says Jonathan Barry, a partner in Mercer’s Retirement business, based in New York. “A fairly modest decline in interest rates was enough to mostly wipe out a pretty positive month of equity returns, highlighting the volatility to which many U.S. plan sponsors are exposed. However, plan sponsors who have implemented risk management strategies have likely cushioned the blow significantly.”

The Mercer analysis finds that during May, small gains in equity markets were largely offset by growth in plan liabilities due to further declines in interest rates used to calculate corporate pension plan liabilities. The collective estimated deficit of $343 billion, as of May 31, is down $17 billion from the estimated deficit of $360 billion, as of April 30, and up $107 billion from the beginning of 2014.

Mercer also notes that U.S. equity markets earned about 2.3% during May based on the S&P 500 Index. Typical discount rates for DB plans, as measured by the Mercer Yield Curve, decreased by 11 basis points to 4.06%, its lowest point in a year, driving liabilities upward.

Barry says, “Long duration fixed income portfolios have continued to perform well, moving in parallel with plan liabilities, and plan sponsors who have implemented risk transfer strategies, such as terminated vested cashouts, have effectively taken equity and interest risk off the table for a portion of their plan liabilities, and have been less affected by the decline in rates.”

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 May 31 in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all nondomestic plans.

The estimated aggregate value of DB 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 May 31, 2014, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of May the estimated aggregate assets were $1.87 trillion, compared with the estimated aggregate liabilities of $2.21 trillion.