August DB Funded Status Remains Level at 91%

The estimated aggregate funding level of pension plans sponsored by Standard & Poor’s (S&P) 1500 companies remained level at 91% in August, as a result of an increase in equity markets that was offset by a decrease in discount rates, according to Mercer.

As of August 31, the estimated aggregate deficit of $192 billion decreased by $1 billion, as compared with the $193 billion measured at the end of July.

The S&P 500 index increased 2.9%, and the MSCI EAFE index decreased 1.5% in August. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 7 basis points (bps) to 4.08%.

“Funded status was flat in August, with another month of favorable returns offset by a slight decline in rates,” says Scott Jarboe, a partner in Mercer’s wealth business. “We expect the extended bull market, coupled with an approximate 50-basis-point risk in discount rates in 2018, will be a catalyst for plan sponsors to review policy and look for opportunities to lock in some gains or transfer risk off the balance sheet. For the many corporate plan sponsors that are making additional tax-favored contributions before September 15, we believe this activity will accelerate.”

Northern Trust reported that the average funded ratio for S&P 500 corporations with pension plans remained near a 10-year high of 90.2%. Northern Trust said this was driven by lower interest rates, with the average discount rate decreasing from 3.87% to 3.82% in August. In addition, the firm said, slightly positive returns in return-seeking assets helped the funded ratio. Global equity markets were up 0.8% in August. U.S. equities posted strong returns, but those gains were muted by a decline in non-U.S. equities.

“August continued the positive pension trend for 2018,” says Dan Kutliroff, head of OCIO [outsourced chief investment officer] business strategy at Northern Trust. “A combination of rising interest rates and positive equity markets improved the funded status from 85% to 90%. This may present a good opportunity for plan sponsors to consider moving to preserve some of those gains by moving some of their assets from equity-like vehicles to fixed-income assets that behave more like the liabilities. While this change could result in a slight reduction in the expected return on asset component, the improved funded status could be enough to offset the lowering of that assumption, mitigating any increase in the P&L [profit and loss] pension expense.”

According to Wilshire Consulting, the funded ratio for U.S. corporate pensions increased by 0.3 percentage points, to end the month of August at 90.7%, up 7.9 percentage points over the trailing 12 months. The monthly change in funding resulted from a 0.4% increase in the liability values more than offset by a 0.8% increase in asset values. The aggregate funded ratio is up 6.1 percentage points year to date and 7.9 percentage points over the trailing 12 months.

“August saw funded ratios increase due to positive market returns for most asset classes,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group at Wilshire Consulting. “August’s 0.3-percentage-point increase in funding brings the aggregate funded ratio to a high point for the year for the second consecutive month and remains over 90% funded for the second time since the end of November 2013.”

October Three reported that the gains in August marked five consecutive months of improvement for pension finances. Both model plans that October Three tracks gained ground in August, with traditional Plan A improving almost 1% and the more conservative Plan B gaining just under 1%. For the year, Plan A is more than 8% ahead, while Plan B is up almost 2%.

Aon said the funding level of pension plans sponsored by S&P 500 companies increased to 89.4%, up from 88.8% in July. Pension asset returns were positive throughout August, ending the month with a 1.2% return. Year to date, the aggregate funded ratio for U.S. pension plans in the S&P 500 improved by 85.6% to 89.4%, according to the Aon Pension Risk Tracker. The funded status deficit decreased by $96 billion, which was driven by a liability decrease of $119 billion, offset by asset declines of $23 billion year to date.