DB Plans Have a Great Start in 2018

Organizations that track defined benefit (DB) plan funded status estimate funding increases from 3% to 5% in January, depending on the tracking method.

The estimated aggregate funding status of pension plans sponsored by S&P 1500 companies increased by 3% in January to 87% at the end of the month, as a result of both an increase in discount rates and positive equity markets, according to Mercer.

The S&P 500 index gained 5.6% and the MSCI EAFE index gained 5% in January. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 18 basis points to 3.74%.

“The volatile markets of early 2018 underscore just how important risk management is for pension plans,” says Matt McDaniel, a partner in Mercer’s US Wealth business. “January was a great month, driving funded status to a four-year high, and plan sponsors with timely execution on dynamic de-risking strategies were able to lock these gains in before the market decline in early February. Sponsors whose governance model doesn’t support systematic de-risking in real time saw these gains evaporate in days, and may continue to realize funded status volatility.”

Also citing discount rates and the equity markets Northern Trust Asset Management estimates the average funded ratio for DB plans in January rose sharply from 82.9% to 86.3%—a greater increase than was experienced in all of 2017 when funded ratios rose from 80.0% to 82.9%.

The aggregate funded ratio for U.S. corporate pension plans increased by 3.8 percentage points to end the month of January at 88.4%, and up 6.4 percentage points over the trailing 12 months, according to Wilshire Consulting. For Wilshire, the aggregate figures represent an estimate of the combined assets and liabilities of corporate pension plans sponsored by S&P 500 companies with a duration in-line with the Citi Group Pension Liability Index – Intermediate. The Funded Ratio is based on the CPLI – Intermediate liability, with service cost, benefit payments and contributions in-line with Wilshire’s 2017 corporate funding study.  The most current month end liability growth is estimated using the Barclays Long Aa+ U.S. Corporate Index.

According to Conning’s monthly pension tracker, the funded status of the average corporate pension plan improved by 4% over the month, from 83% to 87%.

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased 4.4% over the month of January, driven primarily by strong equity returns and an increase in the discount rate. According to LGIMA, it estimates Treasury rates increased by 23 basis points (bps), while credit spreads tightened 5bps, resulting in the discount rate rising 18 bps. Overall, it says liabilities for the average plan were down 2.19%, while plan assets with a traditional “60/40” asset allocation increased by 2.94%.

With both stock markets and interest rates moving higher, January was the best producing month for pension finance in almost three years, according to October Three. Its model Plan A gained 5%, while Plan B gained more than 1%. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.