November Yields Mixed Results for Corporate Pension Funded Status

U.S. corporate pension plan sponsors experienced mixed funding results in November, according to several pension fund trackers. In general, strong equity markets offset any increase in pension liabilities driven by falling bond yields for some of the largest tracked corporate plans.

Discount rates fell sharply in November, declining to 5.3% from more than 6%, the single largest change month-over-month since 2008, per Agilis.

WTW

While most accounts had funded statuses increasing, the WTW Pension Index declined by 1.2% in the November, to 109.2%. WTW’s pension index tracks the performance of a hypothetical 60/40 portfolio, which saw a 7.1% return in the month of November.

According to WTW, because discount rates used by plan sponsors to measure the obligations of pensions move in the opposite direction of the interest rates used for their valuation, the liability growth factor in November increased by 8.4%, resulting in the decline in funded status for the month.

Agilis

According to Agilis, pension funded status performance was mixed last month, varying with the asset allocations of various plans. Plans with shorter duration and higher exposure to equities saw gains in their funded status, while underfunded plans with liability-matching assets saw their funded status decline.

That decline was caused by yields on the 10-year Treasury declining by 50 basis points and the FTSE pension discount curve declining by 70 bps. Equities also had a very strong month, as domestic stocks increased 9%. Equities in Europe, Asia and emerging markets increased by 10%, 7% and 8%, respectively. Market participants are pricing in rate cuts in 2024.

“Changes in funded status this month were not as clear cut and dry as they have been for other months during the year,” Michael Clark, managing director at Agilis, said in the company’s report. “Discount rates were down sharply and asset returns up significantly during November.”

The effect of the market changes on individual pension plans’ funded status varied based on their asset allocations. “For example, plans with high allocations to equities most likely fared better than those with high allocations to liability-matching assets, while shorter duration plans also fared better than their longer duration peers,” Clark said.

October Three

October Three, in its pension finance update, also noted that pension finances were mixed last month. While lower interest rates pushed up liabilities, higher equity returns increased the value of plan assets.

October Three tracks two hypothetical plans. Plan A is a more traditional plan with a 60/40 asset allocation. Plan B, a retired plan, has a 20/80 allocation with an emphasis on corporate and long-duration bonds. Plan A returned 7% in November, while Plan B returned 6%.

October Three noted that Treasury yields fell 0.4% in November, with corporates falling more than 0.5%, producing record low credit spreads. Bonds in October Three’s tracker gained between 4% and 8% as a result. With corporate bond yields falling more than 0.5% last month, pension liabilities increased between 5% and 9%, depending on the portfolio.

Wilshire

According to Wilshire’s monthly corporate pension tracker, the aggregate funded ratio for U.S. corporate pension plans increased by 0.3 percentage points in November, ending the month at 105.1%.

In its tracker, Wilshire found liability value to have increased 7.4 percentage points, which was offset by a 7.8-percentage-point increase in asset value. The aggregate funding ratio has increased by 6.4 percentage points year to date and 5.8 percentage points year over year.

According to Wilshire, November saw the largest monthly increase in liability value since it began tracking corporate pension funded status in December 2012, a result of a significant drop in Treasury yields and corporate bond spreads.

“Corporate bond yields, used to value corporate pension liabilities, are estimated to have decreased by nearly 70 basis points this month,” said Ned McGuire, managing director at Wilshire, in the company’s update. “With several asset classes achieving their best monthly performances in over a decade, notably core fixed having its best monthly performance since 1985, the aggregate funded ratio is estimated to have slightly increased despite the largest monthly increase in liability value in more than 10 years.”

Milliman

The Milliman 100, which tracks the status of the largest 100 U.S. corporate pension plans, found that the funded status for these plans declined to 103.2% at the end of November from 104.1% at the end of October.

The decline was driven by a 65-basis-point decline in discount rates, with rates falling to 5.55% in November from 6.2% in October, the single largest monthly drop since 2008, according to Milliman. This resulted in plan liabilities increasing by $82 billion.

Investment gains of 6.2% were able to offset some of the increased liabilities, with plan assets increasing by $74 billion to $1.302 trillion.

“November saw both the largest monthly investment return and the largest discount rate drop of the year,” said Zorast Wadia, author of the report. “Although these mostly offset each other, the discount rate change was slightly more dominant, resulting in the funded ratio decline. All eyes will be on where interest rates and plan asset values end up in December, as this will lay the foundation for 2024 pension calculations for calendar-year plans.”

Insight Investment

According to Insight Investment, which tracks the average funded status for the largest 100 U.S. corporate pension plans, funded status increased slightly in November.

In November, according to Insight, funded status improved by 0.1 percentage point to 108.2% from 108.1%. Assets increased by 7.8%, with pension liabilities increasing by 7.7%. Both asset and liability returns were 8.5% in November. The average discount rate decreased by 65 bps to 5.45% from 6.10%, largely due to the Treasury rally.

Aon

According to Aon’s pension funding tracker, which tracks corporate pension data for S&P 500 plans, pension plan funded status declined in November. Aon found that S&P 500 pensions saw their funded statuses decrease to 101.9% from 103.1% during the month of November.

Pension assets increased during the month with a 7.4% return. The November month end 10-yr Treasury rate declined by 51 basis points relative to the October month-end rate, with credit spreads narrowing 18 basis points. This resulted in a decrease in the interest rate used to value pension liabilities from 5.47% to 6.16%.

According to Aon, the aggregate funded ratio for U.S. corporate pension plans within the S&P 500 increased to 101.9% from 98.2% at the beginning of the year, an increase of $56 billion in assets, driven by liability decreases of $64 billion that were offset by $8 billion in asset declines.

LGIM America

LGIM’s pensions solutions monitor found that corporate pension funded status increased to 103.4% from 102.2% in November. Plan liabilities increased over the month due to declining discount rates, and the increase in asset values outweighed any increase in the value of liabilities.

Equity markets were strong in November, rising 9.3%, with the S&P 500 increasing 9.1%. LGIM estimated plan discount rates decreased 78 basis points during the month, with the Treasury and credit components decreasing 57 and 21 basis points, respectively.

In a traditional 50/50 portfolio, as tracked by LGIM, plan assets increased by 9.6%, while liabilities increased by 8.2%, resulting in a modest increase in corporate pension funded status.