Administration December 3, 2014

S&P 1500 Pension Deficit Ticks Up in November

Pension plan deficits of Standard & Poor’s (S&P) 1500 companies increased by $17 billion in November.
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The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased, from 84% to 83%, at the end of November, according to Mercer.

The rise in liabilities due to a further decrease in interest rates used to calculate corporate pension plan liabilities overpowered the increase in assets from rising equity markets, causing a 1% dip in the funded status. The estimated aggregate deficit of $384 billion as of November 30 is up $17 billion from the estimated aggregate deficit of $367 billion as of October 31, and up $148 billion from the beginning of the year.

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The S&P 500 index rose by 2.5% during November. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 12 basis points (bps) to 3.86%.

”Despite the strong year for equities, we expect that many plan sponsors will report a lower funded status at the end of 2014 compared with the end of 2013 because of decreasing interest rates coupled with changes in mortality assumptions,” says Jim Ritchie, a principal in Mercer’s retirement practice. “Plan sponsors with glide path strategies that increased their long-term bond positions at the end of 2013 will likely fare much better with year-end reporting than plan sponsors without a glide path strategy. Now is a good time for plan sponsors to review their risk strategy for 2015 with the understanding that the change in interest rates can sometimes overpower equity returns.”

Mercer estimates are based on each company’s year-end statement and by projections to November 30, 2014, in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all non-domestic plans. Allowing for changes in financial markets through November 30, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets at the end of November were $1.90 trillion, compared with the estimated aggregate liabilities of $2.28 trillion.

Data and Research December 3, 2014

Many Lack Basic Retirement Income Knowledge

Just one in five retirement-age Americans can pass a basic quiz on strategies to make their nest eggs last throughout retirement.
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A large majority (80%) of retirement-age Americans received failing grades after taking a basic quiz on how to make their nest eggs last throughout retirement, according to The American College of Financial Services. A recent survey from the organization revealed the well-known “4% rule” is a complete mystery to seven in 10 Americans, and a majority of people age 60 to 75 with at least $100,000 in assets lack important knowledge in areas such as life expectancy, Social Security, long-term care needs, investment risk, and more.

Despite their failing grades, the RICP Retirement Income Literacy Survey indicated more than half (55%) of respondents consider themselves prepared to meet their income needs in retirement, and almost all (91%) are at least moderately confident in their ability to achieve a secure retirement.

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“No one liked getting Fs back in school, but retirement income literacy is a test Americans simply cannot afford to fail,” says David Littell, RICP retirement income program director at The New York Life Center for Retirement Income at The American College. “When you’re working, you can plan, save, and prepare for a retirement target date. But once you’re in retirement, there is no set target date for how long your savings must last, and little room for error.”

With a majority unfamiliar with the “4% rule,” many Americans are unaware of how to preserve their assets in retirement. The survey showed 16% thought it would be safe to withdraw 6% or even 8% per year, while 20% were overly conservative, estimating 2% to be the appropriate annual withdrawal rate. Additionally, only half (53%) know that it can be beneficial to wait until age 70 to claim Social Security for someone with a long life expectancy.

The survey displayed that Americans also lack knowledge when it comes to understanding investments, with only two in five (39%) aware that when interest rates rise, the value of bond funds will often decrease. Littell explains that poor investment decisions by retirement-age Americans can be almost impossible to bounce back from, and can damage both the future growth of a nest egg and the retirement income it can generate over time.

Americans struggle with managing and understanding risk around retirement income, as more than half (51%) underestimate the life expectancy of a 65-year-old man. The study revealed Americans’ lack of knowledge about how much time people should plan to live in retirement, as well as their uncertainty about how to transition into the drawdown phase. Just 30% recognize that it can be more effective to work two years longer or defer Social Security for two years than to increase retirement contributions by 3% for five years.

Americans are facing a retirement income planning deficit and they need help planning, the survey finds. Only 27% report having a written retirement plan in place, despite the fact that 63% say they have a relationship with a financial adviser and 52% state they are at least moderately concerned about running out of money in retirement. In addition, 33% have never tried to figure out how much they need to accumulate to retire securely.

“Basic financial literacy during the working years is dramatically different from the mindset people need when they transition to generating retirement income from their nest eggs,” Littell explains. “Financial advisers, plan sponsors, and financial services companies all have a role to play in raising Americans’ grades when it comes to awareness and understanding of basic retirement income principles.”

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