Falling equity values and declining interest rates dropped the funding ratio of S&P 1500 companies’ pension plans five percentage points to 79% for the two months ended May 31, according to a Mercer report.
Pension deficits among the S&P 1500 companies’ plans have increased an aggregate $84 billion to $336 billion by the end of March, Mercer said in a news release.
Adrian Hartshorn, a partner in Mercer’s financial strategy group, said in a telephone interview that the S&P 1500 companies’ retirement plans have an average 50% in equities, so the 7% fall in equity values had a big impact on plan assets. But AA bond yields also declined by 0.1% to 0.2% since the end of March, causing liabilities to rise.
The weighted average asset allocation in the S&P 1500 universe was 50% equities, 38% fixed income, 3% real estate and 9% other.
The report says that given the variation of equity prices and AA bond yields, changes in funding status should be expected.
“What always surprises me is (plan sponsors) never factor in the impact of AA bond yields,” he said.
“A change in funded status of plus or minus 20%, as is needed to capture 90% of anticipated year-end funded status outcomes, requires some significant market changes. As a rule of thumb, for each 0.25% fall or rise in AA bond yields, funded status would change by around 1.5% ($21 billion) and for each 5% fall or rise in equity markets there would be a change in funded status of around 2.5% ($35 billion). Plan sponsors often discount these outcomes when considering pension plan risk, but it is these risks that are more likely to result in financial stress,” Mr. Hartshorn said in the news release.