Combined, the pension funds sponsored by S&P 1500 companies saw their funded status shrink by $130 billion last month, according to a new analysis released by consultants at Mercer on Tuesday, Dec. 2. That follows the $110 billion loss that these companies’ pension funds posted in October, which was a record drop at the time.

The losses incurred over the past two months, along with the $100 billion in declines registered during the first nine months of the year, bring the combined pension deficit of S&P 1500 companies to an all-time high of $280 billion.

The pension plans of these large companies are now only 80% funded, a sharp decline from the 104% funded status that they boasted at the end of 2007.

This collective deficit can be attributed to more than just last month’s sharp decline in equity markets, Mercer noted. Corporate bond yields—which companies use to determine their pension funds’ stream of liabilities—decreased last month, boosted the plans’ liabilities.

So at the same time pension funds’ assets declined dramatically, their obligations grew larger, creating a “double whammy” for corporate plan sponsors that contributed to the record losses last month.

With the end of the year just weeks away, it’s a significant development—and potentially a major setback—for many large corporations. The drop in asset values means that when companies do their required annual actuarial evaluations, they’re likely to close their books with woefully underfunded pension plans.

Thus, many companies will be required to recognize their pension plan deficits on their balance sheets. And they will likely be forced to make larger cash contributions to their pension funds next year—an outcome that could erode corporate earnings and future profitability.

—Mark Bruno/Financial Week
To comment, e-mail editors@workforce com.
—Crain's Benefits Outlook, December 2008