The aggregate funded ratio for U.S. corporate defined benefit plans sponsored by S&P 500 companies increased by an estimated 0.4 percentage points month-over-month in January to end the month at 95.8%, according to Wilshire.
The monthly change in funding resulted from a 5% decrease in liability values, mostly offset by a 4.6% decrease in asset values.
“January saw significant declines for both asset and liability values,” says Ned McGuire, managing director, Wilshire. “Equities, represented by the FT Wilshire 5000 Index, and the liability value experienced the worst monthly return since the early stages of the COVID-19 pandemic in March 2020. The liability value decreased due to the approximately 40 basis point increase in corporate bond yields used to value corporate pension liabilities. The rise in Treasury yields accounted for nearly two-thirds of the increase in yields.”
He adds: “Due to larger decrease in liability value, January’s funded ratio is at its highest level since year-end 2007, estimated at 107.8%, before the great financial crisis.”
LGIM America estimates that pension funding ratios were relatively stable throughout January, increasing from 92.6% to 92.8%. The fall in liability values from rising discount rates outpaced the poor equity performance on the asset side, resulting in the 0.2% rise in the average plan’s funded status, according to its Pension Solutions Monitor.
But not all organizations that track DB plan funded status reported gains, with many pointing out that the lifecycle stage and concentration of equity investments determined how pensions fared in January.
According to Northern Trust Asset Management, the average funded ratio for pensions sponsored by S&P 500 companies was largely flat in January ending at 96.1% from 95.9%. The negative equity returns were offset by lower liabilities due to higher discount rates.
Global equity market returns were down approximately 4.9% during the month, according to NTAM. The average discount rate increased from 2.51% to 2.86% during the month, leading to lower liabilities.
“The Federal Reserve noted it will soon be appropriate to raise the fed funds rate,” notes Jessica Hart, head of the outsourced chief investment officer retirement practice at NTAM. “Investors perceived Chair [Jerome] Powell’s comments as rather hawkish. Following the press conference, Treasury yields quickly rose and equities declined. While projected earnings of S&P 500 companies are expected to end the quarter up 24% year-over-year, the reports have fallen short of fully reversing the negative market sentiment.”
In January, the aggregate funded ratio for U.S. pension plans in the S&P 500 decreased from 93.4% to 92.3%, according to the Aon Pension Risk Tracker. The funded status deficit increased by $17 billion, which was driven by asset decreases of $97 billion, offset with liability decreases of $80 billion year-to-date.
Pension asset returns were negative throughout January, ending the month by losing 4.2%, Aon says. The month-end 10-year Treasury rate increased 27 bps relative to the December month-end rate, and credit spreads widened by 4 bps. This combination resulted in an increase in the interest rates used to value pension liabilities from 2.56% to 2.87%.
“Given a majority of the plans in the U.S. are still exposed to interest rate risk, the decrease in pension liability caused by increasing interest rates partially offset the negative effect of asset returns on the funded status of the plan,” Aon says.
While the rise in discount rates resulted in a decline in liabilities for the month, plans with equity exposure may have seen a decline in funded status, River and Mercantile says in its “US pension briefing – January 2022.”
“There are lots of negative signals that are resulting in volatility in the markets that we expect to continue to see in the coming months,” says Michael Clark, managing director in River and Mercantile’s Denver office. “For example, the Fed’s announcement in December that we may see more fed funds rate hikes and earlier than expected in 2022, sustained high inflation numbers, weaker than expected quarterly earnings reports and dampened forecasts, but a bright spot in a stronger than expected jobs report in January. So far in February, rates continue to increase and equities continue to be volatile.”
Both model plans October Three tracks were close to even on the month, with Plan A improving less than 1% while the more conservative Plan B lost a similar amount. 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 and a greater emphasis on corporate and long-duration bonds.
Total-return plans with higher duration liabilities and lower fixed-income allocations may have experienced an increase in funded status as opposed to liability-driven investing-focused peers holding more long-dated bonds, NEPC says. Based on NEPC’s hypothetical open- and frozen-pension plans, the funded status of the total-return plan increased by 1.5% as losses from equities were offset by declining liability values. However, the funded status of the LDI-focused plan dropped 0.9%, with asset losses stemming from both equities and long-duration bonds. The hypothetical LDI-focused plan is 77% hedged as of January 31.
Income Research + Management’s analysis of pensions’ funded status changes finds that, despite higher discount rates, negative returns on growth assets in January resulted in varied changes across the funded statuses of its sample plans. Its average plan funded status decreased slightly by 0.1% in January, ending the month at 106%. The average plan is soft-frozen with a target liability duration of 12 to 14 years, and a target asset allocation of 50% growth assets and 50% fixed-income assets.
IR+M says its end stage plan funded status increased by 0.2% and ended January at 114.9%. The plan, which is the most hedged of the firm’s sample plans, was insulated from the drawdown in equity markets. The end stage plan is hard frozen with a target liability duration of eight to 10 years, and a target asset allocation of 15% growth assets and 85% fixed-income assets.
The young plan funded status was 98%, up by 0.6% from the prior month. The plan, with a longer liability duration, benefited from the increase in discount rates. The young plan is open and accruing benefits, with a target liability duration of 15 to 17 years and a target asset allocation of 70% growth assets and 30% fixed-income assets.
“At IR+M, we anticipate a first-quarter pick-up in de-risking activity to protect the significant funded status gains from 2021 and to mitigate the heightened market volatility expected in the upcoming year,” says Theresa Roy, pension and LDI specialist at IR+M.
Sweta Vaidya, North American head of solution design at Insight Investment, urges DB plan sponsors to re-evaluate their appetite for downside funded status risk.
“Our model shows that funded status declined by 0.7%, from 95.6% in December to 94.9% in January,” she says. “The decline was driven by weak returns by equities and other growth assets but partially offset by increases in discount rates during the month. While this is a small decline relative to the approximate 7% improvement seen during 2021, it highlights that gains can be easily lost.”
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