U.S. Corporate-Pension Funding Gap Doubles

The funding gap for U.S. corporate pension plans almost doubled in 2011 as bond yields dropped and stocks failed to keep pace with rising liabilities, The Financial Times reports.

Credit Suisse calculates that, from a moderate surplus at the end of 2007, pension plan assets at S&P 500 companies now cover only about 74 percent of estimated liabilities, for a deficit of nearly $450 billion.

The bank also says that every 25 basis point fall in the discount rate equals a $45 billion increase in liabilities.
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However, the discount rates used by companies has fallen about three times that much this year.

David Zion, head of accounting and research for Credit Suisse said, “You need really good returns to offset that. The typical pension plan has generated slightly positive returns this year, you can’t say that’s good.”

Because companies are required to contribute the amount of any funding shortfall, spread over seven years, some corporations will have to make greater pension contributions next year barring some kind of pension funding relief passed by the U.S. government, which has previously given companies temporary relief from requirements to fund deficits.

Bankers predict some highly rated companies will seek pension-funding help by issuing corporate bonds because their borrowing rates are low. However, much higher contributions could hit some company earnings.

FTSE Global Markets reports that Mercer’s latest Pensions Risk Survey data shows that the accounting deficit of defined benefit pension schemes in the United Kingdom has increased for the second consecutive month.