US - Pension deficits at S&P1500 companies reached $451bn at the end of June according to Mercer, just $1bn short of the previous record high set in January 2009.
Mercer's figures also show the increase in the deficit of $115bn during June, caused by concurrently falling interest rates and equity values, was the third largest increase of the past decade.
The end of June deficit corresponds to a funded status of 73%, compared to 78% at the end of May. The 2009 year-end deficit was $247bn, corresponding to a funded status of 84%.
Mercer financial strategy group partner Adrian Hartshorn said: "On average plan sponsors still have a majority of their assets invested in equities, so the 5.4% fall in equity values over the last month has adversely affected plan assets. Additionally, AA bond yields have also declined by about 40 basis points since the end of May increasing the value of plan liabilities.
"The combined effect of the fall in equity values and the fall in AA bond yields is a five percentage point decline in funded status, and may come a surprise to many plan sponsors."
This current downturn in pension health measures effectively erases gains achieved since January 2009, said Mercer, including $75bn of contributions paid by plan sponsors, he added.
Larger pension deficits will translate into larger required pension contributions in 2011 for most plans under the funding rules of the Pension Protection Act. However, limited pension funding relief was passed by Congress and signed by the President in June.
This legislation will result in somewhat lower contribution requirements over the next several years as it permits deferral or extended amortization of losses experienced during 2009 - 2011, said Mercer.
Hartshorn added that while this relief was welcome news, plan sponsors should continue to evaluate the impact of the recent funded status losses on their investment and contribution policies.
"We expect more plan sponsors to consider the impact their pension plan has on their underlying business and consider ways in which risk can be managed," he said.
"This is likely to involve forecasting the impact of the latest funded status downturn on future contribution and pension expense along with other business metrics.
"Sponsors that choose to reduce risk need to consider the tension that exists between higher ongoing cost and lower volatility. These will be tough decisions and there is no easy solution."
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