US - S&P 1500 defined benefit pension deficits fell by just $8bn last year, despite employer contributions of $77bn and investment returns of $156bn, analysis by Mercer shows.
The consultant's report, How Does Your Retirement Program Stack Up? - 2011, said aggregate assets stood at about $1.4trn at the end of the fiscal year, estimated to be $282bn short of the $1.7trn in pension liabilities recorded at the same time and $211bn short as of March 31, 2011.
"Despite employer contributions of $77bn and aggregate asset returns of $156bn (a 12% median rate of return), pension deficits decreased by only $8bn during the fiscal year," said Eric Veletzos, a principal and consulting actuary with Mercer and the study's author. "Liability growth of $181bn, mostly due to falling discount rates, plus new benefit accruals of $31bn, offset the positive asset performance and contributions."
"While the aggregate funded status has improved only slightly over the last two years, a more positive trend is the marked decline in the number of poorly funded pension plans among the S&P1500 companies. The percentage of companies with plans that are both poorly funded and large relative to the size of the plan sponsor continued to decline to 5% in 2010 from 9% in 2009 and 13% in 2008."
The research found pension assets are still largely invested in higher risk assets such as equities or real estate, with less than 40% allocated to lower risk assets such as fixed income securities - including long-maturity fixed income investments that can offset the changes in plan liabilities when discount rates rise or fall.
"In spite of two 'once in a lifetime' economic events in the past decade, plan sponsors have not materially adjusted their investment policies to reduce the percentage of higher risk assets in their portfolios," Veletzos said. "This has left plans exposed to potentially significant swings in funded status, expense and contributions should another market downturn occur.
"Anecdotally, we are aware that some sponsors are putting in place programs to de-risk their plans over time as funded status improves. However, we have yet to see evidence of this in public filings."
Mercer said given that plan sponsors continue to maintain significant allocations to higher risk assets, projected year-end 2011 funded ratios range from 65% to 107% at the 5th and 95th percentiles, respectively. Most (93%) of companies have underfunded plans; approximately 30% are expecting the significant allocation to higher risk assets to generate asset returns that will exceed the expected growth in plan liabilities.
"In other words, these companies are hoping to at least partially close their pension deficits over time with a more aggressive investment strategy in order to conserve cash. Of course, a higher expected return is accompanied by more volatility," added Veletzos.
A number of pension schemes have been prompted to lock in gains with a move into bonds after the estimated deficit across FTSE 100 DB pension schemes improved by £36bn, over the 12 months ending 30 June last year, JLT Employment Benefits found.
HM Treasury has agreed in principle to give NEST a £329m contingent liability guarantee in the event of the master trust's wind up or closure.
AMP Capital has set up a dedicated team to help institutional investors, including pension funds, invest in infrastructure through direct equity allocations.