The funding ratio of U.S. defined benefit pension plans of S&P 1500 companies declined an aggregate 10 percentage points in the first six trading days of August to 73%, with the funding deficit increasing to $496 billion, up $191 billion from July 31.
A flight to U.S. Treasury buying on Monday, driven in part by Standard & Poor's downgrade of U.S. government debt, has a double negative impact on pension plans, by reducing the value of their riskier assets and increasing the market value of their debt, according to a Mercer news release.
During the first six trading days, the value of equities dropped 13%, while discount rates for the typical U.S. corporate pension plan dropped about 42 basis points.
Jonathan Barry, a partner in Mercer's retirement risk and finance business, said in a telephone interview that the drop in equities is responsible for the majority of the drop in the aggregate funded ratio, but the drop in discount rates also is playing a major role in the decline.
He noted that plan sponsors with fiscal years ended Sept. 30 still have some time to make up the losses.
“There is a little bit of time to recover here,” he said. “The thing I think will really help plan sponsors is if interest rates do creep up a little bit, that's where you could get some benefit.”