The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level at 82% in February 2017, as positive equity markets were partially offset by a decrease in discount rates. As of February 28, 2017, the estimated aggregate deficit of $400 billion remained level as compared to the deficit measured at the end of January 2017, according to Mercer.
Mercer says the S&P 500 index gained 3.7% and the MSCI EAFE index gained 1.2% in February. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 11 basis points to 3.93%.
“Equity markets have continued their run up, with some stock indices reaching all-time highs,” says Matt McDaniel, a partner in Mercer’s Wealth Business. “But when discount rates drop just a few basis points, it takes some of the air out of the sails for pension funded status recovery. For this reason, a best practice for pension sponsors is to structure investment strategies with distinct growth and hedging portfolios. This allows plans to benefit from positive equity returns, while minimizing uncompensated interest rate risk.”
However, according to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 0.2 percentage points to end the month of February at 83.4%, up nearly 7 percentage points over the trailing 12 months.
The monthly change in funding resulted from a 1.9% increase in asset values which outpaced the offset from a 1.6% increase in liability values, Wilshire says.
“February marked the sixth consecutive month of rising funded ratios, which has contributed to February 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 lifting the Wilshire 5000 Total Market Index 3.7% during February.”
Meanwhile, Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased 0.1% over the month of February, with modest gains driven mainly by a rally in global equity markets of 2.85%. LGIMA estimates plan discount rates fell 11 basis points, as Treasury rates fell by 8 basis points and credit spreads tightened 3 basis points. Overall, liabilities for the average plan were up 1.86%, while plan assets with a traditional “60/40” asset allocation increased by 1.98%.