September was another cruel month for large US pension plans, as stock losses and lower interest rates caused the shortfall between their assets and liabilities to balloon to the largest gap since the end of World War II. Pension consulting firm Mercer calculated that pension plans of companies in the Standard & Poor's 1500 Index had a $512 billion shortfall at the end of September, a whopping $134 billion increase during the month.
World-wide, stocks fell 9 percent in September as measured by the MSCI World equity index. Most large pension funds have the bulk of their assets invested in equities. At the same time, the funding shortfall has been exacerbated by the Federal Reserve's efforts to bring down long-term interest rates.
Pension funds use long-term bond rates to calculate the current value of future payouts they will have to make to retirees. When interest rates fall, the current value of the obligations increases. The discount rate, used by pension funds to value future liabilities, fell by 0.3 to 0.4 percentage point during September, Mercer said.
"The end of September marks the largest deficit since we have been tracking this information," Jonathan Barry, a partner at Mercer, said in a statement. "This will have significant consequences for plan sponsors. It will be particularly painful for organisations with September 30 fiscal and/or plan year ends." Measured as a percentage of future liabilities, pension funds in the Mercer survey had assets covering only 72 percent of their obligations at the end of September. That was down from 79 percent at the end of August and 81 percent at the start of the year.
The previous low was 71 percent in August 2010, though the dollar value of the shortfall at that time was $507 billion. The shortfalls could require companies to increase their contributions to the plans. In the most extreme cases, plans might be required to restrict lump sum payouts and freeze accrual of benefits for their employees, Barry said.
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