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The Actuary The magazine of the Institute & Faculty of Actuaries

S&P 1500 pension deficits reach post-WWII high

The deficit rose from $378bn to $152bn, while the aggregate funding ratio dropped to 72% from 79% where it stood at the end of August and from 81% since the start of the year. The previous high point was recorded in August 2010, when the aggregate funding ratio was 71% but the deficit stood at $507bn.

Mercer said the decline was driven by a 7% drop in equities and a fall on high quality corporate bonds throughout the month. Discount rates for the typical US pension plan decreased approximately 30-40 basis points during the month. The funding status of S&P 1500 pension plans peaked at 88% at the end of April and has since declined by 16%, it added.

"The end of September marks the largest deficit since we have been tracking this information," said Mercer retirement risk and finance partner Jonathan Barry.

"Over the past three months, we have seen nearly $300bn of funded status erode. This will have significant consequences for plan sponsors. It will be particularly painful for organisations with September 30 fiscal and/or plan year ends."

Kevin Armant, a principal with Mercer's financial strategy group added: "The recent market turmoil is a reminder to plan sponsors of the need for a pension risk management strategy that is aligned with corporate objectives.

"Those that were aware of the risks and can deal with the increased cash funding and P&L charges associated with the current market downturn may choose to stay the course. Those that can't will continue to evaluate risk reduction opportunities, including increasing interest rate hedging programmes, moving more into long corporate bond allocations or transferring risk through the introduction of a lump sum payment option or purchasing annuities."

"For both types of organisations, it's likely that additional cash funding will be required and it may be useful to look at the option of accelerating those contributions, as some sponsors may have the capacity to take advantage of the low interest rate environment by borrowing to fund."

Source: Global Pensions