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Pension plan funding among some of the nation's largest companies continued to rebound in March, according to a Mercer L.L.C. report released Tuesday.
Pension plans sponsored by S&P 1500 companies saw their aggregate deficit fall to $336 billion, a 30.4% decrease from the 2011 year-end aggregate, the report said. The drop corresponds to a rise in the plans' aggregate funded ratio, to 82% for the month of March 2012, from 79% in the previous month.
Analysts estimated the aggregate value of S&P 1500 pension plan assets at the end of 2011 at $1.45 trillion. The plans' estimated aggregate liabilities were $1.93 trillion.
Mercer analysts said the boost in the plans' funded status for the month was triggered primarily by positive asset performance, noting that U.S. equity markets rose by nearly 3% in March. A 15-base point increase on interest rates on “high-quality corporate bonds,” which analysts use to measure pension liability, also impacted the aggregate results.
Pension assets have also benefited from higher-than-predicted contributions from employers last year, the report said. Companies contributed more than $70 billion in 2011, $20 billion more than had been expected. Companies have indicated they expect contributions to total $54 billion in 2012.
Mercer's report said the improving funded status likely would prompt more plan sponsors to begin shifting their asset allocation philosophy. Weighted average allocations to fixed income investments rose to 40% at the end of 2011, up from 37% in the prior year. That trend, the report said, should help reduce volatility in the market, but also signals a reigning in of sponsors' expectations regarding investment returns.
“Certainly the funded status improvement we saw in the first quarter is a great outcome for most plan sponsors,” Richard McEvoy, a New York-based partner with Mercer’s investment management group, said in a statement released Tuesday. “We are seeing many sponsors who have dynamic derisking strategies in place reaching critical triggers to shift allocations from growth assets to liability matching assets. These strategies will help to dampen a relapse of funded ratios like we have seen three times in the last four years.”
“The rise in funded status, combined with the significant funding we are seeing really should compel many plan sponsors to consider taking more risk off the table,” Mr. McEvoy added.
Looking ahead, Mercer analysts estimated the aggregate S&P 1500 deficit would rise or fall approximately $100 billion depending on the behavior of interest rates.
Aided by a strong equities market, the funding levels of large corporate pension plans improved in January but still are significantly below levels of just a few months ago, according to an analysis by Mercer L.L.C.