Deficits Down in September, Improved Quarterly DB Funded Status

The estimated aggregate funding level of defined benefit (DB) pension plans sponsored by S&P 1500 companies remained low at 77% during September 2016, as discount rates increased and equity markets experienced mixed returns, according to Mercer. However, as of September 30, 2016, the estimated aggregate deficit of $551 billion represents a decrease of $19 billion as compared to the end of August 2016.

Likewise, Wilshire Consulting found the aggregate funded ratio for U.S. corporate pension plans increased by 0.9 percentage points to end the month of September at 76.9%, narrowing its year-to-date decline to 4.5 percentage points. The monthly change in funding resulted from a 1.6% drop in liability values that outpaced a 0.3% decrease in asset values. 

This narrowed the year-to-date decline in funding ratios, which is the result of a 12% increase in liability values, Wilshire said. The 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 Citi Group Pension Liability Index – Intermediate.

The funded status deficit for U.S. pension plans decreased by $10 billion during the third quarter of 2016 to $491.9 billion. According to Aon Hewitt, the change was driven by asset gains of $25 billion offset by a liability increase of $15 billion. Compared to the first two quarters of 2016, the third quarter is the only to show an improvement in funded status for the year.

Data from the Aon Hewitt Pension Risk Tracker, which evaluates daily funded status for S&P 500 companies with defined benefit pension plans, revealed the aggregate funded ratio increased from 76.8% to 77.4% in the third quarter. Pension liabilities increased by 0.68%. Ten-year Treasury rates were up by 11 basis points over the quarter and credit spreads narrowed by 17 basis points, resulting in a 6 basis point decrease in the discount rate over the quarter for an average pension plan.

Aon Hewitt notes that return-seeking assets were strong throughout the quarter: The Russell 3000 Index returned 4.4%; equities outperformed bonds during the quarter, with the Barclay’s Long Gov/Credit Index returning 1.2%; and overall pension assets returned 2.6% over the quarter.

Legal & General Investment Management America’s (LGIMA)’s Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, found pension funding ratios increased over the third quarter from 75.6% to 76.7%.

LGIMA’s Head of Solutions Strategy, Don Andrews, said, “We estimate that funded ratio levels for the typical plan with a traditional asset allocation increased by about 1.1% this quarter, primarily driven by stronger equity markets.”

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% global equity/40% aggregate bond (“60/40”) investment strategy, and incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.