DB Plan Funding Sees Slight Uptick in February

Mercer reports no change in pension funded status, while Wilshire and LGIMA report a modest increase.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level at 82% in February 2017, as positive equity markets were partially offset by a decrease in discount rates. As of February 28, 2017, the estimated aggregate deficit of $400 billion remained level as compared to the deficit measured at the end of January 2017, according to Mercer.

Mercer says the S&P 500 index gained 3.7% and the MSCI EAFE index gained 1.2% in February. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 11 basis points to 3.93%.

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“Equity markets have continued their run up, with some stock indices reaching all-time highs,” says Matt McDaniel, a partner in Mercer’s Wealth Business. “But when discount rates drop just a few basis points, it takes some of the air out of the sails for pension funded status recovery. For this reason, a best practice for pension sponsors is to structure investment strategies with distinct growth and hedging portfolios. This allows plans to benefit from positive equity returns, while minimizing uncompensated interest rate risk.”

However, according to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 0.2 percentage points to end the month of February at 83.4%, up nearly 7 percentage points over the trailing 12 months.

The monthly change in funding resulted from a 1.9% increase in asset values which outpaced the offset from a 1.6% increase in liability values, Wilshire says.

“February marked the sixth consecutive month of rising funded ratios, which has contributed to February month-end funded ratios being the highest since November 2015,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting.  “This month’s increase was primarily driven by the continued post-election increase in equity markets lifting the Wilshire 5000 Total Market Index 3.7% during February.”

Meanwhile, Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased 0.1% over the month of February, with modest gains driven mainly by a rally in global equity markets of 2.85%. LGIMA estimates plan discount rates fell 11 basis points, as Treasury rates fell by 8 basis points and credit spreads tightened 3 basis points. Overall, liabilities for the average plan were up 1.86%, while plan assets with a traditional “60/40” asset allocation increased by 1.98%.

Several Factors Contribute to Lack of Retirement Preparedness

Just 62% of Americans feel confident they will retire comfortably, a survey found. 

As market volatility persists and a wealth of research indicates Americans would need to save more to retire comfortably, many are trailing behind. According to the latest Financial Freedom Survey by Capital One Investing, just 62% of Americans feel confident they will retire comfortably. That figure is down from 64%, which was recorded during the firm’s previous survey.

The new study found that a range of factors contribute to Americans’ retirement-planning flaws including lack of knowledge and experience (51%), distrust of the financial services industry (49%), and lack of pricing transparency (45%).

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Moreover, inertia is preventing a large number of Americans from saving adequately for retirement. The survey found that although 65% are dedicating portions of their income toward retirement saving, only 49% have a long-term financial plan—highlighting Americans’ need for overall financial wellness and money-management skills. Meanwhile, 32% aren’t saving at all. And even though 39% believe people should be saving at least 15% of their income for retirement, only 13% are doing so.

The Capital One Investing study also offers some insight into how Americans are saving for retirement and their preferences for adviser interaction. The study found technology is a key factor in financial planning. Respondents value financial information aggregators (83%), retirement calculators (73%), technology to connect with advisers (71%), human-digital hybrid solutions (69%), and robo-advisers (56%).

“Today’s investors need a combination of great digital tools and unbiased advice to navigate the markets and get on a path to action and confidence,” says Yvette Butler, president of Capital One Investing. “We’re committed to enabling smart investing habits by delivering straightforward, accessible tools and experiences that leverage the best of technology and human advice.”

When it comes to extreme market volatility, however, the majority (74%) prefer human interaction with advisers. The degree to which investors would seek help from human advisers during times of heightened market volatility seems to vary among generations. Sixty-nine percent of Millennials said they would seek human interaction, while 75% of Generation Xers and 74% of Baby Boomers reported the same.

Capital One Investing’s latest Financial Freedom Survey was conducted with input from more than 1,000 adults ages 18 or older living in the continental United States. More information about the findings can be found at CapitalOne.com

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