S&P 500 Pension Deficit Increased in 2015

The Aon Hewitt Pension Risk Tracker, which tracks daily funded status for S&P 500 companies with defined benefit pension plans, found that the funded status deficit of U.S. pension plans increased by $9 billion during 2015.

The aggregate funded ratio decreased from 81.3% to 80.0% for the year. Aon Hewitt estimates this change was driven by a liability reduction of $92 billion, which was outpaced by asset declines of $101 billion for the year.

“2015 was a rollercoaster year for pension plan sponsors as Congress provided another round of funding relief, but also increased PBGC premiums. At the same time, pension plan assets dipped despite continued contribution levels,” explains Ari Jacobs, senior vice president, Global Retirement Solutions leader at Aon Hewitt. “Looking ahead, we anticipate most plan sponsors will budget for additional pension contributions in 2016. This will help plan sponsors close the gap on pension funded status and minimize the impact of PBGC premiums.”

In Q4 2015, the aggregate funded ratio increased from 78.7% from the previous quarter-end to 80.0%. The funded status deficit decreased by $31 billion for the quarter. Asset gains of $14 billion along with a liability reduction of $17 billion largely fueled this change, according to Aon Hewitt.

As rates increased, pension liabilities decreased by 0.84%. Ten-year Treasury rates were up by 21 bps over the quarter and credit spreads narrowed by 13 bps, resulting in an 8 bps rise in the discount rate over the quarter for an average pension plan. Return-seeking assets were relatively prosperous throughout the quarter, with the Russell 3000 Index returning 6.3%. Bonds were outperformed by equities during the quarter, with the Barclay’s Long Gov/Credit Index returning -0.9% over this timeframe. Overall pension assets returned 2.1% over the quarter.

S&P 500 aggregate pension funded status decreased slightly in December 2015 from 80.5% to 80.0%. December month-to-date pension asset returns were mostly negative before settling at a 1.20% return for the month. The month-end 10-yr Treasury rate increased 6 bps relative to the November month-end rate while credit spreads widened by 4 bps. This combination resulted in an increase in the interest rates used to value pension liabilities from 4.13% to 4.23% over the month. Increasing rates decreased pension liabilities to partially offset the negative effects from asset returns on pension funded status.