December Stock Rally Pushes US Corporate Pension Plans to Record Funding Levels

The funded status of the largest U.S. corporate pension funds hit an all-time high at the end of 2023, with many trackers finding U.S. plans fully funded. In December, pension trackers shared mixed results on funded status increases in corporate defined benefit plans, but most trended upward.

WTW

According to analysis by WTW, funded status for the largest U.S. corporate pension plans will end 2023 at 100%. WTW’s tracker, which tracks 358 Fortune 500 companies that sponsor U.S. defined benefits plans, sees funded status for these plans rising to 100% as of the end of 2023, all the way up from 77% during 2008’s global financial crisis.

According to WTW, funded status increased last year due to strong returns in equities, offsetting liability headwinds that resulted from rising interest rates. According to WTW’s tracker, 2023 is the first year since the financial crisis when funded status ended the year at 100% or more.

“The improvement in the financial health of corporate pension plans in 2023 is welcome news to plan sponsors,” said Jason Wilhite, senior director of retirement at WTW.

“Last year proved to be an up and down year for interest rates and equity markets, particularly during the fourth quarter,” Wilhite said in a statement. “But overall, funded status remained relatively stable as interest rates and equity markets largely offset each other, yet it ended the year reaching an important threshold. Additionally, many plan sponsors have made changes to their financial management strategy over the years that are designed to protect funded status.”

The WTW Pension Index ended December and the year at 107.5, a decline from last month, but the change overall represents an increase of 6.1% from the previous year.

October Three

Pension finances were mixed in December, per October Three, which tracks the finances of two hypothetical pension plans. The firm noted that lower interest rates increased liabilities, while strong equities increased the value of pension assets. Whether or not funded status increased or decreased depended on the makeup of a plan.

October Three’s Plan A, a traditional 60/40 portfolio, saw funded status increase slightly in December, a result of a strong equity market that helped the plan return 5% in December and 14% in 2023 overall. With corporate bond yields falling 0.5%, pension liabilities in Plan A increased between 4% and 7% in December, ending the year at an increase of between 5% and 7%.

Plan B, a largely retired plan with a 20/80 allocation, saw funded status stay relatively flat for the month. According to October Three, bonds increased between 4% and 7% in December, roughly in line with Plan B’s December asset return of 4%. This plan ended the year with an 8% return.  

“2023 represents another strong year for pension finance, building on improvement in prior years and improving pension funded status to the best condition this century,” said Brian Donohue, part of October Three’s senior leadership team, in the firm’s report.

Milliman

Milliman, in its Milliman 100 Pension Funding Index, which tracks the largest 100 U.S. corporate pension plans, found that funds in these plans increased by $4 billion throughout 2024. 

Corporate funded status, according to the PFI, ended 2023 at 102.1%, which Milliman noted is the second consecutive year in which there was a year-end surplus in funded status.

Milliman attributed this growth to strong performance in technology stocks, which resulted in average returns for plan assets within the PFI reaching 9.4%. The strong performance was offset by falling discount rates. On October 31, discount rates hit 6.20%, the highest rate in 15 years, according to Milliman. Discount rates fell to 5% by year-end 2023.

“The PFI funded ratio was on a rollercoaster ride throughout 2023, but the last two months of the year had the biggest impact as assets rose 12% while the discount rate plummeted 120 basis points,” said Zorast Wadia, author of the PFI, in a statement. “With the significant discount rate movements seen over the last two months and the general expectations of interest rate cuts in the new year, 2024 is shaping up to bring new challenges for plan sponsors.

Aon

The Aon Pension Tracker tracks the funded status of corporate defined benefit plans for companies in the S&P 500 Index. In December, funded status for these plans decreased to 100.9% from 102.1% at the end of November.

In 2023, the funded status for these plans increased to 100.9% from 98.2%. This represented a funded status increase of $42 billion, of which there was a $66 billion increase in assets, offset by an increase in liabilities of $24 billion.

Pension assets increased by 5.2% in December, according to Aon, but were offset by an increase in pension liability. Due to a 49-basis-point decline in the month-end 10-year Treasury and a 2-bps narrowing in credit spreads, interest rates used to value pension liabilities declined to 4.96% from 5.47%.

Insight Investment

According to Insight Investment’s U.S. Pension Index, which tracks the funded status of the top 100 U.S. corporate pension plans, funded status declined by 1.6 percentage points in December, ending the year at 106.6%. Down from 108.2% in November, Insight attributed the decline to an increase in liabilities outpacing increases in assets.

Insight’s model found that assets increased by 4.9% in December, with liabilities increasing by 6.5%, resulting in the funded status decline. In the same period, assets returned 5.5%. In December, the average discount rate declined to 4.90% from 5.45%, a result of a change in the risk-free rate.

“This recent period of heightened interest rate volatility highlights the importance of hedging interest rates to manage funded status risk,” Insight’s report stated. 

Wilshire

Wilshire estimated that the aggregate funded ratio for U.S. corporate pension plans increased by 0.6% in December, with funded status for these plans ending the month at 105.7%. Wilshire tracks pension funded status through the Wilshire 5000 Index.

“December witnessed a decrease in long Treasury yields for a second consecutive month, leading to approximately a 100 basis point decline in corporate bond yields, which are used to value corporate pension liabilities, since the end of October,” said Ned McGuire, Wilshire’s managing director, in a statement.
“The resulting increase in liability value was more than offset by a second consecutive month of robust returns for most asset classes, with the FT Wilshire 5000 Index delivering its best quarterly return since the fourth quarter of 2020. These changes in asset and liability values pushed the estimated funded ratio to the highest month-end level since Wilshire began tracking funded ratios in 2012.”

Agilis

According to Agilis, funded status changes were mixed, based on plan characteristics. Plans with shorter durations and higher allocations to equities likely saw increases in their funded status, while underfunded plans with more liability-matching assets may have seen their funded status decline in December. 

In December, pension discount rates declined to 4.8% from 5.7% in November. As yields fell, both bonds and stocks posted strong returns, resulting in an increase in funded status for many corporate pension plans.

“The volatility in discount rates over the last two months of the year highlights the need for plan sponsors to carefully watch the quick changes in the market to take advantage of funded status increases that may come and go in the blink of an eye,” said Michael Clark, managing director at Agilis, in a statement. “Going into 2024, plan sponsors will want to consider continued de-risking strategies, potential plan terminations, and investment strategies that can help them improve their overall funded status positions.”

LGIM America

LGIM America’s Pension Solutions Monitor, which tracks the health of a typical U.S. corporate defined benefits plan, found that the average funded ratio for the DB plans increased to 104.1% in December from 103.4% in November.

LGIM America attributed the increase to strong equity returns. Likewise, plan liabilities increased due to decreasing Treasury yields. The increase in assets outpaced the increase of liabilities, leading to the improved funded status. 

The pension solutions monitor tracks a hypothetical plan that has a duration of 12 years and a 50% MSCI All Country World total gross index and 50% Bloomberg U.S. long government/credit index asset allocation. According to LGIM America, plan assets with a 50/50 asset allocation increased 6.4% in December, while liabilities increased 5.7%, resulting in a 0.7-percentage-point increase in funded status.