S&P 1500 Pensions See Largest 2014 Decrease in Liabilities

Increases in interest rates used to calculate corporate pension plan liabilities offset falling equity markets, holding funded status constant. The collective estimated deficit of $352 billion as of September 30, 2014, is down $17 billion from the estimated deficit of $369 billion as of August 31—the largest monthly decrease in pension liabilities this year, Mercer says. The September deficit is up $116 billion from the beginning of the year.

The S&P 500 index dropped by 1.6% during September. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 20 basis points to 4.10%, driving liabilities downward, and offsetting the decrease in plan assets.

“The increase in interest rates and decrease in equities this month is the first major deviation from the trend of decreasing interest rates and increasing equities that we have seen throughout 2014,” says Jim Ritchie, a principal in Mercer’s retirement practice.  “Rising interest rates gave us our largest monthly decrease in pension liabilities this year, but unfortunately the reduction in liabilities was largely offset by losses on assets.”

Ritchie adds, “This change in trends in 2014 is a good reminder that plan sponsors should stress test their risk management strategies to better understand how their strategies will hold up when markets change course. We just saw in the past week two significant  annuity buyouts in the market place, and anticipate many other sponsors will be seriously exploring buyout and other risk transfer strategies to better manage their pension risk, especially if interest rates start rising.”

Mercer’s estimates are based on each company’s year-end statement and by projections to September 30, in line with financial indices. This includes U.S. 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 September 30, 2014, changes to the S&P 1500 constituents, and newly released financial disclosures, at the end of August the estimated aggregate assets were $1.85 trillion, compared with the estimated aggregate liabilities of $2.21 trillion.