Faced with the volatility of equity markets, declining interest rates and rising pension deficits, U.S. corporations are exiting the business of providing and investing defined benefit pension plans. By now, fully one-third of S&P 500 companies have no defined benefit plan liabilities at all.
Of the plan sponsors that still do, our research shows that 60% have either closed or frozen their plans. Meanwhile, the recent high-profile decisions of Ford Motor Co. and General Motors Co. — to transfer pension volatility for thousands of salaried retirees and former employees through lump-sum payout offers and, in the case of GM, through an annuity purchase — only affirm that we've entered a new era of pension plan derisking.
Consider some of the latest numbers. According to figures from Mercer, the aggregate deficit in pension plans sponsored by S&P 1500 companies grew $80 billion in May to $488 billion. This deficit corresponds to an aggregate funded ratio of 76% as of May 31, 2012, compared with a funded ratio of 79% as of April 30, 2012, and just barely above the funded ratio of 75% at Dec. 31, 2011.
Thus, the funding gains achieved in the first three months of 2012 were effectively wiped out by the market trends of the second quarter. Much of this is due to a continued decline in interest rates on high-quality corporate bonds, which are used to measure pension liability. The discount rate for a typical U.S. pension plan, as calculated by the Mercer Pension Discount Yield Curve, dropped to a record low of 4.15%, driving aggregate S&P 1500 liability in excess of $2 trillion for the first time.
Indeed, the growing incentive for DB plan sponsors to address such risks was underscored by GM's June 1 announcement that it would transfer the pension risk for most of the company's salaried retirees — by far, the largest pension buy-out in U.S. history — through a combination of voluntary lump-sum offers and an annuity purchase by Prudential (Oliver Wyman and Mercer, affiliated firms of Marsh & McLennan Cos., were appointed by State Street, the independent fiduciary for the GM plan, to act as its insurance adviser on the transaction). A month earlier, Ford announced it would offer lump-sum pension payout offers to 98,000 white-collar retirees and former employees this summer.