The estimated aggregate funding level of defined benefit (DB) pension plans sponsored by S&P 1500 companies remained at 77% at the end of October, as an increase in discount rates was offset by negative equity markets, according to Mercer data.
As of October 31, the estimated aggregate deficit of $530 billion represents a decrease of $21 billion as compared to the end of September. The aggregate deficit is up $126 billion from the $404 billion deficit measured at the end of 2015, Mercer notes.
The S&P 500 index lost 1.9% and the MSCI EAFE index lost 2.1% in October. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 20 basis points to 3.66%.
“The past few months have been unusually quiet for pensions,” says Matt McDaniel, a partner in Mercer’s retirement business. “It could be that this is the calm before the storm, as markets await the outcome of next week’s elections. Plan sponsors who are worried about fluctuations in funded status would do well to have a plan in place to mitigate risks when the inevitable future shock occurs.”
According to Wilshire Consulting, the institutional investment advisory and outsourced-CIO business unit of Wilshire Associates Incorporated, the aggregate funded ratio for U.S. corporate pension plans increased by 0.5 percentage points to end the month of October at 77.5%, narrowing its year-to-date decline to 3.9 percentage points.
The monthly change in funding resulted from a 2.9% drop in liability values more than offsetting a 2.3% decrease in asset values. This narrowed the year-to-date decline in funding ratios, which has been driven by a 9% increase in liability values.
“Asset values fell due to negative returns for most asset classes during the month. The fall in asset values was more than offset by the fall in liability values resulting from the significant rise in bond yields during the month. This is the fourth consecutive month of either flat or rising funded ratios,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “The Wilshire 5000 Total Market Index declined by just over 2% during the month, while rising corporate bond yields pushed liability values lower for the third consecutive month.” NEXT: Plan sponsor actions