Cooler Markets, Lower Interest Rates Cause DB Plan Funded Status to Decline

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by 1% to 82% funded status in August, as a result of a decrease in discount rates partially offset by mixed equity markets, according to Mercer.

As of August 31, the estimated aggregate deficit of $432 billion represents an increase of $28 billion as compared to the deficit measured at the end of July. The S&P 500 index gained 0.05% and the MSCI EAFE index lost 0.31% in August. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 12 basis point to 3.64%.

“With rates down another 10 bps in August and about 40 bps over the year, growth asset performance has not been able to drive improvement in funded status.” says Scott Jarboe, a partner in Mercer’s Wealth business. “We expect plan sponsors may be pondering contributions in September, which is the plan year close for calendar year plans, to improve funding levels and advance their destination while also defraying future PBGC costs.”

Wilshire Consulting estimates the aggregate funded ratio for U.S. corporate pension plans decreased by 0.9 percentage points to end the month of August at 83.2%t, up 7.3 percentage points over the trailing twelve months. The monthly change in funding resulted from a 1.8% increase in liability values, which was partially offset by a 0.7% increase in asset values.

According to Northern Trust Asset Management estimates, the month of August saw the average funded ratio for corporate pension plans decrease modestly from 82.4% to 81.7%. This decrease can be attributed to interest rates declining from 3.75% to 3.65% during the month and equity markets cooling off as global equities declined 0.1%.

October Three agrees that pension funded status slipped in August, due to flat stock markets and lower long-term interest rates. Both model plans it tracks saw modest declines last month—traditional Plan A dropped more than 1% but is still up 1% for the year, while the more conservative Plan B lost less than 1% in August but also remains 1% ahead so far in 2017. 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.

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios decreased 1.0% over the month of August, with losses driven mainly by a fall in rates and only slight gains in the equity market. LGIMA estimates Treasury rates decreased 19 basis points while credit spreads widened 8 basis points, resulting in the discount rate falling 11 basis points. Overall, liabilities for the average plan were up 1.8%, while plan assets with a traditional “60/40” asset allocation increased by 0.6%.

So Far in 2017

Strong stock markets and lower interest rates have propelled pension assets higher during 2017, but lower rates have also increased liabilities, October Three notes. Through August, plans remain modestly ahead so far during 2017.

Northern Trust Asset Management says the funded ratio of corporate DB plans has improved from 80.0% at the end of 2016 due to positive equity returns outweighing the decline in discount rates. The average plan discount rate has declined 35 basis points. Despite a pause in August, the equity markets have been strong, returning 14.8% for global stocks; led by developed non-U.S. equities and emerging market equites returning 16.4% and 27.7%, respectively.

The aggregate funded ratio remains relatively flat quarter-to-date and is up 1.3 percentage points year-to-date, according to Wilshire Consulting.

However, Mercer says the aggregate deficit for pension plans sponsored by S&P 1500 companies is up $24 billion from the $408 billion measured at the end of 2016.