The aggregate funding ratio of S&P 1500 companies, as studied monthly by Mercer, was 74% at the end of June, slightly below 75% at the end of 2011 and 76% at the end of May. The aggregate pension plan deficit increased $59 billion in the first half of 2012 to $543 billion, including a $55 billion increase in June. However, the deficit had dropped to $336 billion at the end of the first quarter.
UBS' quarterly report shows a typical U.S. corporate pension plan's funding ratio decreased five percentage points to 78% in the second quarter and is relatively flat for the year. Liabilities increased 6% for the quarter.
Although equity returns were strong in June, the discount rate continued to plummet — it reached its all-time low for the Mercer report in June at 3.87%, down 28 basis points from the previous low at the end of May. The drop was compounded by the downgrade by Moody's of 15 major banks on June 21 as a number of them lost their AA credit ratings and are now excluded from yield curves used to set discount rates.
UBS estimates that discount rate dropped about 40 basis points for the quarter.
Equity markets returned 4% in June, according to Mercer. However, UBS said a typical plan's asset pool returned about -1.1% for the quarter, based on the average reported asset allocation weightings from the UBS Pension 500 database. The S&P 500 Total Return index finished the quarter at -2.8% while the MSCI EAFE index was down 7.1%.
However, corporate plans did see some relief with Congress' approval of the highway bill that reduces pension funding requirements by allowing a 25-year average of interest rates used to determine liabilities in the calculation of contributions. Jonathan Barry, a partner in Mercer's retirement risk and finance consulting group, said the report that the bill could result in up to $50 billion in relief for S&P 1500 plan sponsors for 2012 and could total more than $100 billion through 2014.
“While these lower near-term contribution requirements will, rightly, be welcomed by many plan sponsors, the reduction in funding could lower overall funded status of U.S. pension plans in the short term,” Mr. Barry said in the report.
The estimated aggregate value of pension plan assets of the S&P 1500 companies at the end of June was $1.55 trillion, up from $1.52 trillion in May. The aggregate liabilities reached a record high of $2.09 trillion, up from $2.01 trillion in May.