S&P 1500 companies were sitting on a record aggregate pension deficit of $484 billion at the end of 2011, according to Mercer. This corresponds to a funding ratio of only 75 per cent.
How are they dealing with pension problems?
Rather than pay off the deficit with soaring corporate profits, “many plan sponsors are merly treading water, or even moving backwards on funded status,” says Mercer’s Jonathan Barry. “For many companies, the larger deficit will drive higher P&L expense, as well as large increases in pension funding requirements for 2012.”
Many corporations are also hiding their deficits with unrealistic equity assumptions, notes The Economist:
[E]xecutives seem to be counting on an equity-market rally to dig them out of the hole. Mr. Lapthorne finds that companies are expecting a return of 10%, after costs, from the equities in their pension-fund portfolios…
The evidence suggests that companies themselves don’t really believe such rosy forecasts. A Duke University poll of chief financial officers shows they have an average forecast for equity returns over the next 10 years of 6.3%. So why do their companies allow such predictions for pension returns to stand? The answer is that if they used more realistic numbers, they would have to contribute more money to make up for the shortfall. And that would dent their profits and thus their [own] share prices.