The funding ratio of S&P 1500 companies dropped five percentage points to 73% in June, increasing the combined deficit by $115 billion, to $451 billion, according to a Mercer report.
The declining funded ratio in recent months “effectively erases gains achieved since January 2009, including $75 billion of contributions paid by plan sponsors in 2009,” according to a Mercer news release on the report.
Report co-author Gordon Young, U.S. integrated retirement financial management leader at Mercer, said in a telephone interview that the $451 billion deficit is just slightly better than the $452 billion deficit in January 2009, the worst month ever reported by Mercer.
“There is inherent risk in pension plans and especially if the plan does not invest in assets that are highly correlated with the liabilities,” Mr. Young said. “That risk can manifest very quickly when equity returns go down and the interest rates go down.”
In the news release, Adrian Hartshorn, a partner in Mercer's financial strategy group, said: “On average, plan sponsors still have a majority of their assets invested in equities, so the 5.4% fall in equity values over the last month has adversely affected plan assets. Additionally, AA bond yields have also declined by about 40 basis points since the end of May, increasing the value of plan liabilities.”
The estimated aggregate assets of the 1,500 pension plans was $1.23 trillion as of June 30, while aggregate estimated liabilities were $1.68 trillion.