Equity Returns Gave Pension Funding a Boost in July

Providers that track pension funding status note that interest rates could affect funding levels for the rest of this year.

By Rebecca Moore | August 07, 2017
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The aggregate funded ratio for U.S. corporate pension plans increased by one percentage point to end the month of July at 84.3%, up 8.3 percentage points over the trailing twelve months, according to Wilshire Consulting.

Wilshire attributes this to a 1.3% increase in asset values, which was partially offset by a 0.3% increase in liability values. Year-to-date, the aggregate funded ratio is up 2.4 percentage points.

“July’s increase was driven by the increase in asset values resulting from positive returns for most asset classes as equity indices notched multiple record closes throughout the month,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies also increased by 1% to 83% in July, as positive equity markets were offset by a decrease in discount rates, according to Mercer, a wholly owned subsidiary of Marsh & McLennan Companies. As of July 31, the estimated aggregate deficit of $404 billion represents a decrease of $12 billion as compared to the deficit measured at the end of June. The aggregate deficit is down $4 billion from the $408 billion measured at the end of 2016.

“Interest rates finally stopped their fall, allowing equity gains to drive a modest improvement in funded status,” says Matt McDaniel, a partner in Mercer’s Wealth business. “But rates remain depressed, and are still only 40 basis points above their 2016 lows. Rising rates would help funded status, plan sponsors will need a plan to capture these gains, or else they will continue to face significant risk.”

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased 1.1% over the month of July, from 82.8% to 83.9%, with gains driven mainly by a strong month in the global equity markets and minimal changes to pension discount rates. LGIMA estimates Treasury rates increased 4 basis points while credit spreads tightened 6 basis points, resulting in the discount rate falling 2 basis points. Overall, liabilities for the average plan were up 0.6%, while plan assets with a traditional “60/40” asset allocation increased by 1.9%.

NEXT: Year-to-date funding improvement and expected discount rates