According to October Three, pension plans managed to tread water last month, with assets and liabilities growing about 1% each during May for both model plans it tracks. Through the first five months of 2017, Plan A is ahead 2% to 3%, while Plan B is up almost 1%.
For October Three, Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. It assumes overhead expenses of 1% of plan assets per year, and assumes the plans are 100% funded at the beginning of the year and ignore benefit accruals, contributions, and benefit payments in order to isolate the financial performance of plan assets versus liabilities.
Overall, its traditional 60/40 portfolio gained 1% in May and is now up 6% to 7% for the year, while the conservative 20/80 portfolio was also up 1% last month and is now ahead 4% during 2017.
However, Milliman found the funded status of the 100 largest corporate defined benefit (DB) pension plans decreased by $22 billion during May as measured by the Milliman 100 Pension Funding Index (PFI). The deficit grew to $279 billion from $257 billion at the end of April due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. The funded status decline was partially offset by investment returns during May. As of May 31, the funded ratio fell to 83.8%, down from 84.9% at the end of April.
Legal & General Investment Management America (LGIMA) estimates that pension funding ratios decreased 0.3% over the month of May, with modest losses driven mainly by a fall in the Treasury rate and a tightening in credit spreads, offsetting the gains in the global equity markets. LGIMA estimates plan discount rates fell 12 basis points, as Treasury rates fell by 9 basis points and credit spreads tightened by 3 basis points. Overall, liabilities for the average plan were up 2.1%, while plan assets with a traditional “60/40” asset allocation increased by 1.7%.
Mercer’s estimate of the aggregate funding level of pension plans sponsored by S&P 1500 companies found it remained static at 83% funded status in May, with a decrease in discount rates offsetting positive equity markets. As of May 31, the estimated aggregate deficit of $391 billion represents a decrease of $1 billion as compared to the deficit measured at the end of April.The aggregate deficit is down $17 billion from the $408 billion measured at the end of 2016, according to Mercer. The S&P 500 index gained 1.2% and the MSCI EAFE index gained 3.1% in May. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 12 basis points to 3.82%.