News Release

Contact:
Charles Salmans
+1 212 / 345 4512 / charles.salmans@mercer.com

US pension plan funding levels plummet in August
Wild month has potential ramifications for 2012 financials

New York, September 6, 2011
The aggregate deficit in pension plans sponsored by S&P 1500 companies increased by $73 billion during August, from a deficit of approximately $305 billion as of July 31, 2011, to $378 billion as of August 31, according to new figures from Mercer . This deficit corresponds to an aggregate funded ratio of 79% as of August 31, compared to a funded ratio of 83% at July 31, 2011 and 81% at December 31, 2010.

The decline in funded status was driven by a 5.4% drop in equities, and a fall in yields on high quality corporate bonds during the month. Discount rates for the typical US pension plan decreased approximately 7-9 basis points during the month. Mercer’s analysis indicates the S&P 1500 funded status peaked at 88% at the end of April, and has since seen a 9% decline.

“August was a wild ride” said Jonathan Barry, a partner with Mercer’s Retirement Risk and Finance Group. “We saw funded status plummet on August 8 due to the sharp fall in equity markets and declining Treasury yields, and a lot of ups and downs over the subsequent weeks. A small rally in equities in the last week of August, combined with widening credit spreads on corporate debt, provide some recovery from the early losses, but overall, the outcome was still bad news for pension plans.”

Despite what seems to be unprecedented market volatility, Mercer’s analysis indicates that funded status swings like this are not as unlikely as one might think, and plan sponsors should be prepared for continued volatility going forward. “For the typical pension plan invested 60% in equities and 40% in aggregate fixed income, the monthly volatility of funded status is between 3% and 4%. The decline in August shouldn’t be seen as an outlier and there is the potential for even more volatility prior to the end of the year,” said Kevin Armant, a principal in Mercer’s Financial Strategy Group.

“What occurred in August 2011 was similar to the perfect storm of September 2008 with both falling interest rates and equity markets. The outcome wasn’t as severe, however, and conditions are not considered as dire as they were during 2008.” said Mr. Armant. “Nevertheless, it’s important to keep in mind the potential consequences for those plan sponsors who haven’t adjusted their management policies to reflect what was experienced during 2008. By and large, we have seen that those sponsors who had an effective risk management strategy in place by the beginning of this year, have fared far better than those who didn’t. Many of the strategies employed, such as liability driven investing, dynamic derisking, and liability transfers through lump sums or annuities, have proven quite effective, and should be evaluated by all plan sponsors.”

Mercer also notes another comparison to 2008 that may not be as favorable for plan sponsors. “After the market downturn in 2008, Congress passed a version of funding relief that helped plan sponsors reduce their required contributions to plans in 2009 and 2010.” said Mr. Barry. “For the most part, those techniques that were used to lower contributions are no longer available, and plan sponsors will likely face significant funding increases in 2012 and beyond, especially if the conditions from August continue through year-end”.

Mercer estimates the aggregate combined funded status position of plans operated by S&P 1500 companies on a monthly basis. Figure 1 shows the estimated aggregate surplus/(deficit) position and the funded status of all plans operated by companies in the S&P 1500. This is based on projections of their reported financial statements adjusted from each company’s financial year end to June 30 in line with financial indices. This includes US domestic qualified and non-qualified plans and all non-domestic plans. The estimated aggregate value of pension plan assets of the S&P 1500 companies at December 31, 2010, was $1.37 trillion, compared with estimated aggregate liabilities of $1.68 trillion. Allowing for changes in financial markets though the end of August 2011, changes to the S&P 1500 constituents and newly released financial disclosures, the estimated aggregate assets were $1.40 trillion, compared with the estimated aggregate liabilities of $1.78 trillion as of August 31, 2011.

Notes for Editors
Unless otherwise stated, the calculations are based on the Financial Accounting Standard (FAS) funding position and include analysis of the S&P 1500 companies.

Information on the Mercer Yield Curve is available at: www.mercer.com/pensiondiscount

About Mercer
Mercer is a global leader in human resource consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues by designing, implementing and administering health, retirement and other benefit programs. Mercer’s investment services include investment consulting, implemented consulting and multi-manager investment management. Mercer’s 20,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York and Chicago stock exchanges. For more information, visit www.mercer.com.