The aggregate funded ratio for U.S. corporate pension plans decreased by 5.9 percentage points to end the month of December at 84.6%, equal to year-end 2017, according to Wilshire Consulting.
The monthly change in funding estimated by Wilshire for 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 resulted from a 3.2% increase in liability values compounded by a 3.5% decrease in asset values. The aggregate funded ratio was down 6.9 percentage points for the quarter and flat for the year.
“December saw funded ratios decrease due to the worst monthly percentage loss for the Wilshire 5000 in nearly a decade,” says Ned McGuire, Managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “December’s 5.9 percentage point decrease in funding was the largest monthly decline since Wilshire began tracking monthly funded ratios in 2013.”
Likewise, October Three found December was the worst month for pensions in a decade, due to plunging stock markets and lower interest rates. Both model plans it tracks gave back all 2018 gains and then some. Plan A lost 8% last month, ending 2018 down 1%, while the more conservative Plan B lost more than 2% in December, ending 2018 down almost 2%. 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.
Brian Donohue, partner at October Three Consulting, says the S&P 500 and NASDAQ fell 9%, the small-cap Russell 2000 lost 12%, and the overseas EAFE index dropped 6%. For the year, the NASDAQ lost 3%, the S&P 500 fell 4%, the Russell 2000 was down 11%, and the EAFE index lost 14%. A diversified stock portfolio lost 9% in December and almost 8% for all of 2018.
Bonds gained 2%to 3% last month, as Treasury rates fell 0.3%, while credit spreads increased modestly. For the year, a diversified bond portfolio lost 1% to 4%, with long duration bonds and corporates doing worst.
Overall, October Three’s traditional 60/40 lost almost 5% in December and more than 5% for the year, while the conservative 20/80 portfolio was flat in December and down more than 4% for the year.
Corporate bond yields fell 0.25% in December, pushing pension liabilities up 2% to 4%. For the year, liabilities fell 3% to 6%, with long duration plans seeing the biggest drops.
Legal & General Investment Management America’s (LGIMA)’s Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, estimates the average funding ratio declined from 91.5% to 84.4% over the quarter based on market movements.
Global equity markets decreased by 12.65% and the S&P 500 decreased 13.52%. Plan discount rates increased by 3 basis points, as Treasury rates decreased 23 basis points and credit spreads widened 26 basis points. This resulted in a 0.74% increase in plan liabilities. Overall, plan assets with a traditional 60/40 asset allocation fell 7.05%, resulting in a 7.1% decrease in funding ratios over the fourth quarter of 2018.
Ciaran Carr, senior solutions strategist at LGIMA, says, “We continue to see an uptick in demand for more customized strategies to help hedge interest rate risk and mitigate funded ratio risks. Completion management, multi-asset hedging and tail risk strategies remain in high demand as plans hope to reduce downside risk and invest in more diverse asset classes.”
The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% global equity/40% aggregate bond investment strategy, and incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.
Barrow, Hanley, Mewhinney & Strauss, LLC (Barrow Hanley) estimates that the average corporate pension plan funded ratio fell to 84.2% as of December 31, 2018, from 90.5% as of September 30, 2018. Funded status varies significantly by industry. For example, Barrow Hanley says, solvency rules require banks to reduce their reported capital by the amount that pensions are underfunded. Plans sponsored by Banks were among the best funded with an average funded ratio of 99.5%. By contrast, Airlines, have more lenient funding rules than other corporate pension sponsors and they also have one of the lowest average funded ratios at just 68.5%.
The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies as of December 31, 2018, increased to 85% from 84% as of December 31, 2017, according to Mercer. Over the course of 2018, decreases in equity and fixed income markets were offset by increases in interest rates used to calculate corporate pension plan liabilities to support the slight increase in funded status. The estimated aggregate deficit of $312 billion as of December 31, 2018, is $63 billion less than the $375 billion deficit at the end of 2017.
Throughout most of 2018, funded status remained higher than in 2017, Mercer notes. By November 2018, funded status had improved to 91% but tumbled in December to 85% as a result of a decrease in U.S. equity markets and a decrease in discount rates.
“Looking forward to 2019, we think many plan sponsors will continue to explore risk transfer activities as well as review their investment policies to ensure they are aligned with an evolving market environment,” says Scott Jarboe, a partner in Mercer’s Wealth business.
Northern Trust Asset Management (NTAM) says 2018 was a roller coaster year for corporate pension plans. They achieved multi-year funded ratio highs of 91% through the end of Q3; however, due to the stressed capital markets in Q4, funded ratio declined during the year from 85.2% to 83.8%. Global equity markets were down approximately 9.4% during the year, and the average discount rate increased from 3.31% to 3.91% during the year due to higher treasury yields and wider credit spreads.
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