Pension deficits are expected to increase this year among corporate defined benefit plans in most developed markets because of declining bond yields that increase liabilities, according to new research by Mercer.
Equity values in most developed markets “have been volatile throughout 2010, although in many cases returns over the past 12 months have been positive,” a report based on the research said. But companies with large DB plans “preparing their financial statements under current market conditions would still report larger pension plan deficits than those 12 months ago.”
“In some markets, bond yields have fallen by over a quarter,” the report said. AA corporate bond yields in the U.S. fell to 4.94% as of Aug. 31, from 6.97% as of June 30, 2008, according to the report.
“A 50-basis-point fall in discount rates roughly results in a 10% increase in liabilities for a pension plan,” Frank Oldham, Mercer’s global head of pension risk consulting, said in the report. “As a result, measures of pension liabilities have increased faster than the value of the assets held across numerous markets. The result is even larger deficits on company balance sheets.”
In the U.S., the deficit of pension plans sponsored by S&P 1500 companies rose by an aggregate $76 billion so far in 2010 to a combined $506 billion as of Aug. 31, the largest shortfall ever recorded by those companies, according to Mercer. The aggregate deficit is more than double their 2009 year-end deficit of $247 billion.
In Canada, pension deficits overall are expected to more than double to an aggregate C$50 billion (US$48.5 billion) from C$20 billion.
In the Netherlands, the total deficit of the pension plans of 48 companies Mercer measured rose to €59 billion ($79 billion) at the end of August from €24 billion at the end of December.