US pension deficits widen for second year

The aggregate deficit of pension schemes sponsored by S&P 1,500 companies in the United States increased by $169 billion during 2011 to reach $484 billion, according to research by Mercer.

This deficit corresponds to an aggregate funded ratio of 75% as of 31 December 2011, compared to a funded ratio of 81% at the same date on 2010.

The decrease in funded status in 2011 is primarily attributable to the increase in liabilities resulting from a decrease in discount rates throughout the year. On the asset side, US equity markets were up approximately 1% for the year, and there were strong returns for US fixed income.

However, less than 45% of pension scheme assets are generally invested in fixed income and shorter maturity bonds, so these positive returns only had a small impact on their overall funded status.

Jonathan Barry, partner in the retirement risk and finance consulting group at Mercer, said: “With US and non-US equity indices underperforming expectations and interest rates on high-quality corporate bonds declining upwards of 100 basis points, driving discount rates down and plan liabilities up significantly, we saw a marked decline in funded status.

“We also saw wide fluctuations in funded status through the year, with the aggregate funded status peaking at about 88% at the end of April, and hitting a low of 71% at the end of September, the largest month-end deficit we have ever seen since we began tracking this information.

“Many plan sponsors are merely treading water, or even moving backwards on funded status, despite significant cash contributions to their plans. For many companies, the larger deficit will drive higher [profit and loss] expense, as well as large increases in pension-funding requirements for 2012.”

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