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Member, Beacon International Group, Ltd.
Funding levels of large corporate pension plans slumped in June as continuing weak interest rates boosted the value of plan liabilities, according to an analysis released Tuesday by Mercer L.L.C.
The average funding level of pension plans sponsored by companies in the S&P 1500 fell to 74% as of June 30, down from 76% as of May 31 and 79% as of April 30.
In all, the aggregate deficit of the plans hit $543 billion as of June 30, up from $484 billion at the end of 2011.
Still, the news is not all bad. Legislation given final congressional approval last month, and which the White House says President Barack Obama will sign Friday, will effectively allow employers to use higher interest rates to value liabilities—especially for benefits paid over the next five years—and reduce the amount they have to contribute to their plans.
In 2012 alone, employers in the S&P 1500 may be able to reduce contributions by $40 billion to $50 billion and still meet federal requirements, New York-based Mercer estimates.
On the other hand, that same legislation will substantially boost premiums employers with underfunded plans have to pay the Pension Benefit Guaranty Corp.
The legislation increases the base PBGC premium—currently $35 per plan participant—to $42 in 2013 and $49 in 2014.
What is known as the variable rate premium also will increase. Starting in 2013, the current $9 premium per $1,000 of plan underfunding in 2013 will be indexed to match the average rise in national wages. In addition, the variable rate will increase by $4 per $1,000 of underfunding in 2014, with another $5 increase in 2015.
However, regardless of the amount of underfunding, the maximum annual variable rate premium for underfunded plans could not exceed $400 per participant.
“The increase in PBGC premiums that come with the new legislation certainly gives sponsors an incentive to keep plans well-funded,” Jonathan Barry, a Mercer partner in Boston, said in a statement.
Hammered by the slump in the equities markets and falling interest rates, the funding levels of large corporate pension plans slumped in May, according to an analysis released Monday by Mercer L.L.C.