S&P 1500 companies' defined benefit pension plans had an aggregate funding ratio of 78% in November, up from 75% in October, according to Mercer.
The overall funding deficit fell to $391 million as Nov. 30, down from $471 billion the previous month.
The increase in funding ratio was driven by an increase in yields on high-quality corporate bonds, as well as an equity market that mostly recovered from earlier losses in the month, with a final loss for November of 0.2%, Kevin Armant, principal in Mercer's financial strategy group, said in a news release.
Although November was the second consecutive month with a funding ratio increase, Mercer predicted the aggregate funding ratio at the end of 2011 will likely be lower than the 81% at the end of 2010.
In addition, even though discount rates for the typical S&P 1500 company pension plan also increased about 40 basis points during November, they are expected to be more than 40 points lower at the end of December than they were at the end of 2010. The lower discount rates, in addition to underperforming equities, will cause corporations that use a Dec. 31 measurement date to likely see larger pension liabilities on their balance sheet, as well as higher 2012 pension expense, Mr. Armant said in a telephone interview.
It will make 2012 a challenging year, he added. “It's actually going to make the strategies more complex. The reality is (that) interest rates have fallen and what the equity performance have been, the contribution and expense are going to be higher,” Mr. Armant said.
“It's going to be even more challenging to adopt some of the more traditional LDI strategies.”