Administration August 7, 2017

Equity Returns Gave Pension Funding a Boost in July

Providers that track pension funding status note that interest rates could affect funding levels for the rest of this year.
Reported by

The aggregate funded ratio for U.S. corporate pension plans increased by one percentage point to end the month of July at 84.3%, up 8.3 percentage points over the trailing twelve months, according to Wilshire Consulting.

Wilshire attributes this to a 1.3% increase in asset values, which was partially offset by a 0.3% increase in liability values. Year-to-date, the aggregate funded ratio is up 2.4 percentage points.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

“July’s increase was driven by the increase in asset values resulting from positive returns for most asset classes as equity indices notched multiple record closes throughout the month,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies also increased by 1% to 83% in July, as positive equity markets were offset by a decrease in discount rates, according to Mercer, a wholly owned subsidiary of Marsh & McLennan Companies. As of July 31, the estimated aggregate deficit of $404 billion represents a decrease of $12 billion as compared to the deficit measured at the end of June. The aggregate deficit is down $4 billion from the $408 billion measured at the end of 2016.

“Interest rates finally stopped their fall, allowing equity gains to drive a modest improvement in funded status,” says Matt McDaniel, a partner in Mercer’s Wealth business. “But rates remain depressed, and are still only 40 basis points above their 2016 lows. Rising rates would help funded status, plan sponsors will need a plan to capture these gains, or else they will continue to face significant risk.”

Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased 1.1% over the month of July, from 82.8% to 83.9%, with gains driven mainly by a strong month in the global equity markets and minimal changes to pension discount rates. LGIMA estimates Treasury rates increased 4 basis points while credit spreads tightened 6 basis points, resulting in the discount rate falling 2 basis points. Overall, liabilities for the average plan were up 0.6%, while plan assets with a traditional “60/40” asset allocation increased by 1.9%.

NEXT: Year-to-date funding improvement and expected discount rates

Northern Trust says the month of July saw the average funded ratio for corporate pension plans increase modestly from 81.8% to 82.4%.

This increase can be attributed to the following factors:

  • Global equities returned 2.8%;
  • Interest rates declined slightly from 3.77% to 3.75% during the month.  Declining interest rates lead to higher liabilities; and
  • The favorable asset returns were slightly offset by higher liabilities, resulting in a modest increase to the funded ratio.

According to Northern Trust, the funded ratio has improved from 80.0% at the end of 2016 due to positive equity returns outweighing the decline in discount rates. The average plan discount rate has declined 25 basis points. Thus far, 2017 has been a story of global growth: Equity returns have been strong, returning 15.0% for global stocks; led by non-U.S. equities returning more than 18%.

The aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 80.9% to 81.7%, year-to-date, according to the Aon Hewitt Pension Risk Tracker. The funded status deficit decreased by $1 billion, which was driven by asset growth of $81 billion, offset by a liability increase of $80 billion year-to-date.

October Three also says strong stock markets have buoyed pension sponsors this year, overcoming lower interest rates to produce improvements in pension funded status, and July saw a continuation of this trend. Both model plans it tracks enjoyed modest (less than 1%) improvement last month and remain in the black for the year so far. Traditional Plan A is now up more than 2% this year, while the more conservative Plan B is ahead 1% through the first seven months of 2017.

Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

October Three notes that Congress passed a budget in 2015 that includes a third round of pension funding relief since 2012. The upshot is that pension funding requirements over the next several years will not be appreciably affected by current low interest rates (unless these rates persist). Required contributions for the next few years will be lower and more stable than under prior law.

Discount rates moved down a couple basis points last month. October Three expects most pension sponsors will use effective discount rates in the 3.5% to 4.1% range to measure pension liabilities right now. More information is here.

Reader Responses August 7, 2017

SURVEY SAYS: Importance of Employer Reputation

We covered a survey that found 71% of U.S. workers say they would not apply to a company experiencing negative press; however, only 6% of workers have left a company due to negative press.
Reported by

Last week, I asked NewsDash readers, “Would you leave your company if it was experiencing negative press, and how important is your firm’s reputation to your job satisfaction?”

The majority (78.6%) of responding readers work in a plan sponsor role, 14.3% are TPAs/recordkeepers/investment managers, 3.6% are advisers/consultants and 3.6% are attorneys.

Get more!  Sign up for PLANSPONSOR newsletters.

Only 3.4% of respondents said they would leave their company if it was experiencing negative press, while 17.2% said they would not and 79.3% said it depends on how bad the situation is.

Half indicated their company’s reputation is somewhat important to their job satisfaction, and 40% reported it is very important. Only 6.7% said their company’s reputation is not very important to their job satisfaction, and 3.3% indicated it is not at all important.

In verbatim comments, the major theme was that not all press can be believed. Some folks placed conditions on what kind of press would give them second thoughts about their jobs. Editor’s Choice goes to the reader who said: “Often, what the press says isn’t the full story.” 

A big thank you to all who participated in the survey!

Verbatim

Jobs are sometimes hard to come by so I wouldn't just outright quit, but I would begin a job search.

While I place a strong value on a company's reputation, I also have a strong skepticism about negative press and accusations. I've read stories with half-truths or outright lies on many different topics that are slanted to promote an agenda rather than having journalistic integrity. The press has a bad reputation, too.

An old boss of mine once wisely commented that when you lie down with dogs, you can expect to get fleas. That's true of all human relationships, customers, and yes - employers.

I would like to think it would be important for me to stay to help the company through a difficult situation. However, if the owners did something unethical, immoral or severely unsafe I would have a hard time staying.

You need to be diligent about understanding the facts and deciphering the press.

I hesitate to judge a company (or person) based on negative or even positive press. I've seen situations where the press has horribly misrepresented a situation so although anything I hear may be a piece of what forms my opinion, it would be the only piece.

Regardless of negative press or a change in company reputation, employees deserve to have their pension assets looked after. I'd be concerned, but unlikely to leave.

The reason for the negative press, and whether I agree with it or not, is critical in making the decision to stay or go.

It would depend upon why the negative press. The press is pretty good about bashing anyone and anything for next to nothing.

I thought all press was good press?

Verbatim (cont.)

Often, what the press says isn't the full story.

The decision to leave would depend on what the bad press was about. Was it because the company manipulated the market or was it because the CEO used their expense account for a shoe fetish while the company was going broke? I can handle the fetish thing but not market manipulation.

I've worked for big pharma and big retailing, both of which have received loads of negative publicity. As long as your job isn't directly involved in the negative publicity, you're usually fine.

An organization's reputation reflects the collective reputations of its employees.

It's important to work for an ethical company that I can feel proud of and recommend to others. Why spend such a large amount of your time working for a company you don't believe in?

This is an everyday struggle, because so many of my co-workers are idiots.

It depends on the nature of the situation. If it were illegal or nefarious activities and I knew that to be true, I would probably leave or already be gone by the time it hit the press. If I knew the allegations to be untrue, I would have to think about that.

Most problems can be fixed. Time heals. If it weren't negative, the press wouldn't report on it.

Long-term prospects of a bad reputation signal a change coming soon. Layoffs, sale, name change or the most unlikely the company does the right thing. All could impact employment, compensation and the next position.

Negative press is not always honest press. If I was working on I would know from an insider’s view if that press was true. I also may be the one who could change it if I felt it was wrong.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Strategic Insight or its affiliates.

«