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By John Goff
The stock market finally threw in a clunker in October. After seven straight months of positive returns, equities were down nearly two percent last month.
Normally, a drop in stock prices would be bad news for pension-plan sponsors, leaving them with even greater funding requirements. But according to Mercer Investment Consulting, a rise in the yields of high-quality corporate bonds in October offset the dismal stock market performance during the month.
According to Mercer, pension plans sponsored by S&P 1500 companies wound up $307 billion in the hole by the end of October. That works out to a funding status of 80 percent. While this is a worrisome gap, it's actually an improvement on where pension plans stood at the end of 2008. As of Dec. 31, 2008, large U.S. pension plans were short $409 billion. That translated to a 75 percent funded status.
Nevertheless, rising bond yields will take a toll on pension expenses. Indeed, rising yields on high-quality corporate debt will boost the discount rate plan sponsors use to determine future liabilities. Mercer is now estimating that the S&P 1500 will be hit with a $40 billion pension expense tab in 2010. That's nearly double what those companies recorded in 2008.
The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2008, was $1.21 trillion, compared with estimated aggregate liabilities of $1.62 trillion.
Mercer reckons the estimated aggregate pension assets at the end of 2009 will be $1.21 trillion, compared with the estimated aggregate liabilities of $1.52 trillion.
Of course, a $10 billion decrease in a roughly $300 billion funding shortfall is hardly cause for celebration. The harsh reality is, despite some regulatory flexibility over the timing of contributions, corporate pensions plans remain fundamentally underfunded. Indeed, Mercer expects a phasing in of greater funding requirements in 2010 to help close the gap. Thus, plan sponsors can expect to make greater cash contributions next year.
There's just one hitch. The need for additional funding, said Mercer's Hartshorn, "comes at a time when we expect that plans will have little or no credit balances available to help pay these contributions."
Ouch.
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