October slightly scarier for corporate pension funding

The funded status of corporate defined benefit plans gauged by Mercer and BNY Mellon dropped slightly in October after two consecutive months of gains, according to monthly funded status reports from the two firms.

The funded status of S&P 1500 companies' DB plans decreased one percentage point to 72% in aggregate, as studied by Mercer, while funding for the typical corporate DB plan decreased 1.4 percentage points to 73.6%, according to BNY Mellon.

The declines in both reports were attributed to poor equity market returns and a modest discount rate decrease.

Equity markets fell about 2% in October, while the discount rate decreased six basis points to 3.58%, resulting in a pension deficit increase of $26 billion to $619 billion, according to Mercer.

“Rates are so low, it's harder to get lower than they already are,” said Jonathan Barry, a partner in Mercer's retirement risk and finance consulting group, in a telephone interview. “I think there's a bit of a floor there … but there's no sign of rates going up.”

For the typical corporate plan, assets declined 0.7% for October while liabilities increased 1.1% as the discount rate fell six basis points to 3.72%, according to BNY Mellon.

“October appears to have been a lackluster month as investors await the election results,” said Jeffrey Saef, managing director at BNY Mellon Asset Management and head of the investment strategy and solutions group, in a news release.

Mr. Barry said continued market volatility, coupled with funding relief from the federal highway bill enacted in July, has ramped up pension derisking strategies — a trend not likely to go away anytime soon. He was not surprised to see Verizon Communications Inc. announce it will transfer $7.5 billion in pension liabilities in an annuity purchase and expects to see more similar deals in the next year. Lump-sum payments, especially to former employees, will likely increase in 2013 as companies can contribute less to their DB plans and are looking to lessen participant-driven premiums they pay to the Pension Benefit Guaranty Corp.

“I don't think that trend's slowing at all,” Mr. Barry said of lump-sum offers.

The estimated aggregate value of pension plan assets of S&P 1500 companies as of Sept. 30 was $1.57 trillion, down from $1.6 trillion at the end of September. Estimated aggregate liabilities remained relatively flat at $2.19 trillion.