The funded status of traditional pension plans has deteriorated again this year, leaving companies that sponsor plans with quite a hole to climb out of in coming years and suggesting more companies will freeze or close such plans.
“2012 so far has been a difficult year for pension plan sponsors,” says Jonathan Barry, who leads Mercer’s defined-benefit risk consulting efforts for its U.S. retirement risk and finance business. “Even though we’ve had decent equity returns for the year, interest rates have dropped so much that the majority of U.S. pension funds’ funded status has declined.”
In addition to the continued low levels of interest rates and volatile financial markets, the Mercer report notes points to other factors affecting plan funding. The Moving Ahead for Progress in the 21st Century Act enacted this summer gave companies leeway to lower their funding requirements. At the same time, the legislation increased the premiums that plan sponsors pay to the Pension Benefit Guaranty Corp.
Mercer also notes a change in the Society of Actuaries’ mortality assumptions that Barry says could boost plans’ liabilities by 2% to 8%, depending on a plan’s demographics and whether it pays lump sums or annuities.