US - The aggregate funded ratio in S&P 1500 pension plans increased to 75% in October from 72% in September, though much of the gain was wiped out at the beginning of this month, figures from Mercer show.
The rise in funded status is the largest one-month improvement since September 2010 when it improved 4%. In October, the increase was driven by an 11% gain in equities, partially offset by the continued decrease in yields on high quality corporate bonds, said Mercer.
The S&P 1500 aggregate deficit dropped $41bn to $471bn during the month.
However, much of the improvement was wiped out in the first trading day of November, as most equity markets faced significant declines.
Jonathan Barry, a partner at Mercer's retirement, risk and finance business said: "Market volatility continues to make many plan sponsors very uneasy. While most of October showed gradual improvement in funded status, we actually saw a 3% drop in funded status in just the last two days of the month. Furthermore, it is likely that much of the gain we saw in October was wiped out in just the first day of November."
Discount rates for the typical US pension plan decreased approximately 15 basis points during the month.
According to Mercer, most plan sponsors will face cash flow problems as Pension Protection Act requirements trigger significantly higher cash contributions in 2012.
Craig Rosenthal a partner at Mercer said: "Sizable increases in funding requirements were already expected for 2012, due to declining interest rates, and the results of the further downturn this year could exacerbate the situation. The effect of these recent events will place additional pressure on pension plan funding levels and trigger higher required contributions for coming years due to the short time for funding deficits under PPA."
According to BNY Mellon, which released similar findings today, pension funds should consider the impact of the European debt crisis and US budget negotiations before making asset allocation decisions.
BNY Mellon Asset Management managing director Jeffrey Saef said: "Apparent progress toward a solution to the European debt crisis resulted in investor optimism. However, as the probability of a resolution rises and recedes, we see continuing market volatility.
"If favourable outcomes can be achieved for these issues, it could set the stage for continuing the rally in equities that we saw in October. Such a rally would provide significant relief to the funding pressures that sponsors face."
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