The funded status of US defined-benefit corporate-pension plans continued to worsen last year, despite plan sponsors increasing contributions by $70 billion, a new Mercer study reveals.
Mercer found funding levels have slipped to 2009 levels, with the outlook for 2012 likely to extend the bleak news for plan sponsors.
The funded status of pension plans sponsored by companies in the S&P 1500 declined from 81 per cent at the end of 2010 to 75 per cent by the end of 2011. Funded status continued to decline in 2012 as these plans hit a record low of 70 per cent as of July 31, representing a shortfall of $689 billion.
Low growth, high volatility
Eric Veletzos, principal and consulting actuary with Mercer’s retirement, risk and finance business, puts the blame for the continuing slide in funded status on the low-returns environment coupled with record-low interest rates.
“Liability growth exceeded asset returns for the fourth consecutive year, offsetting these contributions,” Veletzos says.
The median asset return for 2011 was 2.9 per cent, down from 12.1 per cent in 2010 and 18.5 per cent in 2009.
Meanwhile, the median pension liability grew by 13.7 per cent in 2011, the third consecutive year with liability growth in excess of 10 per cent.
The high liability rate of growth is driven by decreasing interest rates.
Stacking up risk
Mercer’s research paper, How Does Your Retirement Program Stack Up, bases analysis on information contained in the 10-K reports filed by companies in the S&P 1500 for the 2011 fiscal year.
The figures reveal that the prevalence of what Mercer describes as “risky” plans in the S&P 1500 increased from 4.7 per cent during 2001, an increase of nearly 70 per cent.
“These plans are poorly funded and more material compared to the size of the corporations, so pension risk is a major issue for these organisations,” he says.
The tough environment is reflected in the expectations of plan sponsors, with Mercer noting median expected return had declined marginally from 7.92 per cent to 7.73 per cent by the end of 2011.
Part of this can be explained by a general trend among corporate defined-benefit plans to gradually de-risk their investments away from high-risk assets, such as equities, to fixed-income investments.
Mercer is seeing a range of strategies from funds aimed at controlling the volatility of their funded status. These include liability-driven investing and other risk-management strategies.
The consultant is also seeing increased interest in risk-transfer strategies such as lump-sum cash-outs and annuitisation.
Ford and General Motors are two recent high profile examples of corporate-pension plans that have looked to transfer risk to a third party. This trend is expected to gather pace in the coming years.