DB Plans See Funded Status Gains of Up to 2% in February

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 2% in February to 90%, as a result of an increase in discount rates and U.S. and international equity markets, according to Mercer.

As of February 28, 2019, the estimated aggregate deficit of $217 billion decreased by $45 billion as compared to $262 billion measured at the end of January.

According to Mercer, the S&P 500 index increased 2.97% and the MSCI EAFE index increased 2.33% in February. Typical discount rates for pension plans as measured by the Mercer Yield Curve rose slightly from 4.04% to 4.09%.

“February was another strong month for equity markets driving funded status higher,” says Scott Jarboe, a partner in Mercer’s US Wealth business. “With strong performance in equities since the beginning of the year, the market environment has proven plan sponsors should be ready at all times to act on opportunities as funded status can change dramatically in a short period of time. Recent gains in funded status could open doors to risk transfer and management strategies that seemed less feasible just two months ago after the sharp downturn to end 2018.”

River & Mercantile also says funded status likely improved during February on the back of strong equity markets. According to the firm’s Retirement Update, global equity markets have now made up all of December’s losses. U.S. equities were up 3.5% and international equities were up 2.5%. Typical discount rates rose by a small amount. A rise in long U.S. Treasury yields was offset by narrowing credit spreads.

Wilshire Consulting estimates the aggregate funded ratio for U.S. corporate pension plans increased by 1.8 percentage points to end the month of February at 88.8%. The monthly change in funding resulted from a 1.2% increase in asset values and a 0.9% decrease in liability values. The aggregate funded ratio is up 4.3 percentage points year-to-date, erasing nearly all of the funding ground lost in December and returning to slightly positive territory over the trailing twelve months. 

Wilshire’s 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 FTSE Pension Liability Index – Intermediate.

Aon’s interactive Pension Risk Tracker shows an 87.6% funded status for the 344 S&P 500 companies with defined benefit (DB) plans it tracks. According to Aon, pension asset returns increased in February, ending the month with a 1.2% return. The month-end 10-year Treasury rate increased by 10 bps relative to the January month-end rate, and credit spreads narrowed by 6 bps. This combination resulted in an increase in the interest rates used to value pension liabilities from 3.79% to 3.83%. Given a majority of the plans in the U.S. are still exposed to interest rate risk, the decrease in pension liability caused by increasing interest rates compounded the positive effects from asset returns on the funded status of the plan, Aon says.

Legal & General Investment Management America (LGIMA) estimates that the average DB plan’s funding ratio increased 1.4% to 87.9% in February. It says gains were driven primarily by positive equity returns.

LGIMA estimates the discount rate’s Treasury component increased by 8 basis points (bps), while the credit component decreased 5 bps, resulting in a net increase of 3 bps. Overall, liabilities for the average plan decreased 0.2%, while plan assets with a traditional 60/40 asset allocation increased by approximately 1.6%.

Both model plans October Three tracks improved in February: Plan A gained 2% and is now up 5% for the year, while Plan B gained less than 1% and is ahead almost 2% through the first two months of 2019.

Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. The consultant says February was a good month for equities, while bonds slipped as interest rates crept up. Corporate bond yields rose a few basis points in February, leaving pension liabilities essentially unchanged during the month. For the year, liabilities remain up 2% to 3%.

Looking ahead, Brian Donohue, partner at October Three Consulting, says pension funding relief has reduced required plan funding since 2012, but under current law, this relief will gradually sunset by 2022, increasing funding requirements for pension sponsors that have only made required contributions. “Discount rates moved up a smidgen last month. We expect most pension sponsors will use effective discount rates in the 3.9% to 4.3% range to measure pension liabilities right now.”