US Corporate Pension Funding Levels Dropped in August

The drop in global equities led to the first overall decline 2023.

U.S. corporate pension funding levels fell last month, matching a drop in global equities, according to analysts.

The August report from LGIM America’s Pension Solutions Monitor estimated that the average U.S. corporate funding ratio decreased to 103.6% through August from 104.9% at the end of July.

Global equities declined 2.8%, with the S&P 500 decreasing 1.6%. Portfolios in plans with a 50/50 allocation declined 2.5%, while liabilities declined 1.4%. The decrease in assets outpaced the decline in liabilities, leading to lower funding ratios.

This is the first decline in corporate pension funding since December 2022 according to LGIM America data, which has seen funding ratios increasing from 98.3% at the end of last year and from 96% last August.

Insight Investment also reported that funding status fell in August, to 106.5% from 106.9% a month earlier. Insight Investment also reported asset and liability declines of 1.6% and 1.3%, respectively.

Sweta Vaidya, head of North American solution design at Insight Investment, noted in a statement that, “unlike last month, equity returns were weak and dragged down funding status even as discount rates increased 15 [basis points]. It is a gentle reminder that equity volatility can easily undo any potential funded status gains from discount rates rising—important to keep in mind as the fed provides mixed signals on whether it will hike rates another 25 bps or stay the course.”

Despite the trend of declining funding levels, Mercer found that pension funding increased in August. Mercer analysts reported the S&P 1500 pension funding status increased by one percentage point to a 108% funding ratio. Discount rates increased to 5.37% from 5.19%.

“With higher discount rates and improved funding for many defined benefit sponsors, we continue to see a lot of activity, with plan sponsors taking a fresh look at strategy and in many cases executing pension risk transfer and investment de-risking strategies,” Mercer partner Scott Jarboe said in the company’s report.

Mercer representatives did not respond to requests for further detail about the firm’s analysis.

Aon’s model found pension funding levels decreased to 101.5% by the end of August from 101.7% at the end of July. Assets declined 1.7%, and credit spreads widened by 6 bps. The month-end 10-year Treasury rate increased 12 bps. The interest rates used to value pension liabilities increased to 5.32%. from 5.14%.

The WTW Pension Index also declined in August due to weak equities, along with a decline in liabilities as a result of interest rate hikes. WTW’s model tracks the hypothetical performance of a portfolio with a 60/40 ratio of equity to fixed income. The equity portion returned negative 2.4% for the month, with the fixed-income portion returning negative 05%.

Agilis reported in its U.S. pension briefing that liabilities decreased between 1% and 2% last month, as both equities and fixed income had negative returns. Negative returns in equities outweighed the 0.18% rise in discount rates, which now sit at 5.18%.

According to October Three’s pension finance update, a hypothetical plan with a 60/40 asset allocation lost 2% in August but remained up 9% for the year. A plan with a 20/80 asset allocation also lost 2% in August but is up 3% for the year. October Three noted while it was not a good month for equities, 2023 is shaping up to be a good year for pension sponsors.

Wilshire Associates pension funding tracker found that corporate pension funding fell 0.1% in August, to 105.0%. Wilshire attributed the decline to a 2.3% decline in asset values, offset by a 2.1% decline in liabilities.

“After four consecutive months of funded status increases, August experienced a slight decrease,” Ned McGuire, a managing director at Wilshire, said in a release. “Despite the decrease in most asset classes—with international equity experiencing the worst monthly decrease since September 2022—the liability value also decreased due to rising yields.”

Milliman reported pension funding for the 100 largest U.S. corporate pension funds declined to 103.3% from 103.6% in August. Asset value declined 1.55%, to $1.327 trillion from $1.354 trillion during the month. Milliman projected the funding ratio for corporate plans will rise back to 103.6% by the end of the year and could reach 105.2% if asset return rates and discount rates are stable at 5.8% and 5.41%, respectively.

In a scenario with interest rates rising to 6.24% from 5.61% by the end of 2024, with a 9.8% return on investments, funding ratios would climb to 107% by the end of the year and 120% by the end of 2024, Milliman projected. If discount rates decline to 5.21% by year-end 2023 and 4.61% by year-end 2024 with annual returns of 1.8%, the 2023 funding ratio would decline to 100%, and the 2024 ratio would fall to 91%.

US Drops to 20th in Natixis Global Retirement Index

Despite improvements in employment and income inequality, the U.S. slipped in the ranking, as high inflation and public debt caused overall retirement security to deteriorate.

Due to high inflation, steep public debt and a sharp decline in U.S. health scores, the U.S. fell two spots in the 2023 Natixis Global Retirement Index. 

The U.S. dropped to 20th from 18th among the 44 countries included but received a higher overall score for retirement security than in 2022. The higher overall score is mainly the result of improvements in employment and wage gains, according to the report. 

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Research revealed that optimism on the macro level, however, is not being felt in the everyday lives of retirees and working Americans. 

Natixis created the GRI in 2012 in collaboration with CoreData Research to “establish a global benchmark that incorporates the wide variety of factors essential for people to enjoy a healthy and secure retirement including not only important financial factors but also access to and cost of health care, climate conditions, the state of governance and general happiness of the population.”  

Across four sub-indices, the U.S. ranked as follows in the 2023 GRI: 

  • 13th for finances in retirement, down from 11th 
  • 21st for material well-being, up from 30th 
  • 21st for quality of life, no change 
  • 25th for health, down from 17th 

The sharp decline in the health sub-index is largely due to the effect on life expectancy of the COVID-19 pandemic and an increase in drug-related and accident deaths, according to Natixis.  

The U.S. received an overall score of 71% in 2023, up from 69% in 2022. Among the top 25 countries in the index, the U.S. received the second-lowest scores for inflation and government indebtedness.  

For the second consecutive year, Norway held first place, followed in order by Switzerland, Iceland and Ireland—all of which held the same rankings in 2022. The U.K. moved ahead of the U.S. for the first time in five years at 16th, up from 19th. As a whole, nearly all developed countries received a higher overall score for 2023.  

“The common drivers of performance among the top 25 countries on the GRI are higher interest rates as well as improvements in employment levels and progress on environmental policies,” the report stated.  

After surveying affluent, individual investors with at least $100,000 in investable assets, Natixis found that 46% of working respondents in the U.S. said inflation is “killing their dreams for retirement.” Meanwhile, many Americans expressed concern about the potential threat of reduced Social Security benefits, which ranked as their top fear about retirement, the survey found.  

The survey also revealed that 47% of those still working think it will take a miracle to be able to retire securely, up from the 41% who said the same in 2021. 

“It’s important for plan sponsors to recognize the savings challenge facing plan participants,” said David Goodsell, executive director of the Natixis Center for Investor Insight, in an emailed response. “Inflation has left a mark and as we see with investors, many are making tough choices between short term cost increases and their ability to save for long term goals.” 

Besides concerns of Social Security depletion, 77% of Americans surveyed by Natixis said they worry that high levels of public debt will result in reduced retirement benefits. When asked about their greatest fears about retirement, the top answer was a cut in government benefits, which 51% agree would make it difficult to make ends meet financially.  

In addition, rising interest rates should be good news for retirees, creating more favorable conditions to generate steady income from their retirement savings and enhancing the ability of bonds to provide a “risk ballast” in portfolio construction. But even though interest rates have risen, only 22% of retirees and 45% of workers plan to add bonds to their portfolios this year, in part because only 3% of U.S. investors understand how rates affect bond prices and yields, Natixis found.  

According to the survey, 53% of Americans said they accept that they will have to keep working longer than anticipated, and more than one-third of retirees said their finances are tighter than they had expected.  

In the short-term, Goodsell said participants will need more incentives and opportunities to save, like those included in the SECURE 2.0 Act of 2022.  

“Emergency savings, student loan matches, and increased contribution limit are all new tools to use in plan design,” Goodsell said. “The investment offering is another place that can help drive participation and contribution rates. For example, 73% of plan participants in the U.S. say they are likely to up their participation if they have access to sustainable investments.” 

Natixis’s GRI rankings are based on an aggregate of mean scores from 0% to 100% for 18 performance measures in each of four categories—finances in retirement, material well-being, health and quality of life—which were then combined to provide a final overall ranking of the 44 nations studied.  

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