Market Volatility Didn’t Bring Down DB Plan Funded Status in November

The estimated aggregate funding level of defined benefit (DB) plans sponsored by S&P 1500 companies increased by 1% in November to 91%, as a result of an increase in U.S. equity markets, according to Mercer.

As of November 30, the estimated aggregate deficit of $197 billion decreased by $11 billion as compared to $208 billion measured at the end of October.

The S&P 500 index increased 1.79% and the MSCI EAFE index decreased 0.31% in November. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by one basis point to 4.42%.

“We saw a slight increase in pension funded status thanks to a rise in equity markets at the end of November,” says Matt McDaniel, a partner in Mercer’s US Wealth business. “We continue to see volatility in equity markets which is a concern for plan sponsors. Many plan sponsors with glide paths in place were able to lock in gains earlier this year while others may be in a tough position as market volatility has continued.”

Wilshire Consulting’s 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 found the aggregate funded ratio increased by 0.7 percentage points to end the month of November at 90.3%.

The monthly change in funding resulted from a 0.3% increase in liability values, which was more than offset by a 1.0% increase in asset values. The aggregate funded ratio is up 5.7 percentage points year-to-date and up 4.5 percentage points over the trailing 12 months.

According to October Three, pension finances stabilized in November, with both model plans it tracks treading water during the month. Plan A eked out a fractional improvement in November and is now up 6% for the year, while the more conservative Plan B was unchanged last month and remains ahead by less than 1% through the first eleven months of 2018. 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.

October Three says a diversified stock portfolio added more than 1% in November and is now up 1% for the year. Bonds gained close to 1% last month, as Treasury rates moved down more than 0.1% while credit spreads increased by almost as much, leaving corporate bond yields down just a couple basis points. Through November, a diversified bond portfolio is down 3% to 5%, with long duration bonds and corporates doing worst.

Corporate bond yields fell a couple basis points in November, pushing pension liabilities up less than 1%. For the year, liabilities remain down 4% to 8%, with long duration plans seeing the biggest drops.

Legal & General Investment Management America’s (LGIMA)’s Pension Solutions’ Monitor shows pension funding ratios slightly increased throughout the month of November, primarily driven by widening credit spreads and positive equity returns. These gains were somewhat offset by a decrease in Treasury rates. It estimates that the average plan’s funding ratio increased 0.7% to 90.3% during the month of November.

LGIMA estimates the discount rate’s Treasury component decreased by 11 basis points, while the credit component increased 12 basis points, resulting in a 1-basis-point increase. Overall, liabilities for the average plan decreased approximately 0.3%, while plan assets with a traditional 60/40 asset allocation increased approximately 1.1%.

According to Northern Trust Asset Management (NTAM), during the month of November, the average funded ratio for S&P 500 corporations with pension plans basically remained steady, just inching up from 88.6% to 88.7%. This was primarily driven by a slight increase in asset returns partially offset by a drop in discount rates.

NTAM says global equity markets were up approximately 1.5% during the month, and the average discount rate decreased from 4.16% to 4.13%.