Pension plan funding slumps in May: Mercer

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.

The average funding level of pension plans sponsored by companies in the S&P 1500 fell to 76% as of May 31, down from 79% as of April 30 and 82% as of March 31.

“We saw a big step backwards for most U.S. pension plans in May which, on top of declines in April, essentially wiped out the positive performance we saw in the first quarter of the year,” Jonathan Barry, a Mercer partner in Boston, said in a statement.

“It's further proof of the significant volatility that most U.S. plan sponsors are exposed to—in just the past two months we have seen a decline of $152 billion” in plans' aggregate funded status, Mr. Barry said.

Some employers, though, are implementing new strategies to move away from volatility risks inherent with defined benefit pension plans.

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For example, General Motors Co. announced last week that it will offer 42,000 retirees in a pension plan offered to salaried employees a one-time opportunity to take a lump-sum payment in lieu of their monthly benefit. In addition, GM will purchase a giant group annuity policy from Prudential Insurance Co. of America to cover benefits of retirees who decline the lump-sum offer and others not eligible for the offer.

Through its actions, GM expects a $26 billion reduction in its salaried pension plan obligations.

“This is a landmark action. For some time, we have anticipated that one of these large transactions would occur and would set a precedent. Many other sponsors of large plans have to be looking at this option,” Sean Brennan, a principal in Mercer's financial strategies group in New York, said in a statement.

On an aggregate basis, plans sponsored by S&P 1500 companies were underfunded by $488 billion as of May 31, up sharply from $408 billion at the end of April.