Plan sponsors have seen significant improvements in the funded status of their pension plans over the past 12 months, but these gains could be eroded if market volatility returns, reports Mercer.
The latest figures from the HR consulting firm for the end of December show an improvement in funded status to 85% (deficit of $229 billion). The 2008 year-end deficit was $409 billion, corresponding to a funded status of 75%.
“Over two-thirds of U.S. companies have a financial year-end of Dec. 31. The improved funded status will add $180 billion to the balance sheets of U.S. companies, which, over time, will improve earnings and reduce the need for future cash contributions,” says Adrian Hartshorn of Mercer’s financial strategy group.
He cautions, however, that “in 2010 some companies may see increased cash contribution requirements or higher FAS pension expense because of smoothing methods which deferred 2008 losses.”
The analysis shows that most plan sponsors continue to have assets invested primarily in equities. Equity returns are volatile and have a relatively low correlation to the changes in value of plan liabilities. As a result, the funded status of pension plans is likely to remain volatile.
“Plan sponsors and fiduciaries need to ensure adequate due diligence is carried out before altering the strategic asset allocation, however, investment committees also need to be able to make decisions effectively,” says Hartshorn. “We believe that plan sponsors and fiduciaries need to adopt a much more practical approach to decision making. This includes improving the efficiency and timeliness with which decisions are implemented, partnering more effectively with advisors, focusing on the important decisions and outsourcing where appropriate,” he adds.
