Did Positive Returns Help Pension Plans in January?

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained relatively level at 82% at the end of January 2017 as compared to the end of 2016, according to Mercer.

The positive equity returns in January were not enough to move the needle last month as discount rates remained relatively flat. As of January 31, 2017, the estimated aggregate deficit of $400 billion decreased by $8 billion as compared to the $408 billion deficit measured at the end of 2016.

”January is another reminder that equity returns alone will likely not improve the funded status of pension plans,” says Jim Ritchie, a partner in Mercer’s retirement business. “Many pension plans have large exposures to fixed income assets with durations much shorter than the liabilities, resulting in a significant bet on interest rates going up in the future. While most pundits believe interest rates will go up in the long run, it is the short run that creates havoc on plan sponsors’ balance sheets and income statements. Another interesting development this year will be the release of the Financial Accounting Standards Board’s update for recognizing pension expense. This update may result in a reduction in the amount of expense recognized as operating expense with the remaining amount essentially falling ‘below the line’. These two issues should encourage plan sponsors to re-think their asset allocation strategies for their pension plans.”

However, according to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 1.2 percentage points to end the month of January at 83.2%, up nearly 5 percentage points over the trailing twelve months. 

Wilshire says the monthly change in funding resulted from a 1.2% increase in asset values and a slight decrease in liability values. 

Asset values increased due to positive returns for most asset classes during the month. The liability value decreased due to a small increase in corporate bond yields. “January marked the fifth consecutive month of rising funded ratios, which has contributed to January 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 increasing the Wilshire 5000 Total Market Index by nearly 1.8% during January.”