The aggregate funded ratio for U.S. corporate pension plans sponsored by S&P 500 companies increased by an estimated 0.6 percentage points month-over-month in April to end the month at 92.9%, according to Wilshire.
The monthly change in funding resulted from a 2.2 percentage point increase in asset values partially offset by a 1.7 percentage point increase in liability values. The aggregate funded ratio is estimated to have increased by 6.1 and 12.6 percentage points year-to-date and over the trailing 12 months, respectively.
“April’s increase in funded ratio was driven by positive monthly returns for nearly all asset classes, led by the Wilshire 5000 Total Market Index, due to optimism around states beginning to reopen and improving economic data,” says Ned McGuire, managing director at Wilshire.
Brian Donohue, a partner at October Three Consulting, explains: “The reversal in interest rates in April put a halt to shrinking pension liabilities this year, but continued strong stock markets enabled plans to protect recent gains in the face of lower rates.”
Both model plans October Three tracks improved less than 1% last month. Through the first four months of 2021, Plan A is now up 12%, while the more conservative Plan B has improved 3% this year. 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.
According to River and Mercantile’s US pension briefing – April 2021, pension discount rates retraced some of the increase seen so far this year but are still up approximately 0.6% in 2021. Liabilities generally increased during the month. However, equity market returns continued to increase as the global economy kept improving and generally outperformed liabilities.
As a result, River and Mercantile says, most pension plans will see very little change or a slight improvement in funded status in April. Those with higher equity allocations and less interest rate hedging will see the largest improvements, the company adds.
“Discount rates retreated slightly from the prior month, but equities continued their upward momentum during April. The combination will most likely leave plan sponsors with better funded status ratios to close out the month,” says Michael Clark, managing director and consulting actuary with River and Mercantile. “Many plan sponsors have been focused on how to apply the funding relief provisions passed in the American Rescue Plan Act and are analyzing their contribution requirements for 2021 and beyond. Contributions, pension risk transfer [PRT] opportunities and a fresh look at investment strategy should be top of mind for every plan sponsor at this point in 2021.”
Other firms that track pension funded status came up with similar estimates for the month of April. LGIM America’s Pension Solutions’ Monitor shows that pension funding ratios increased approximately 0.4 percentage points throughout the month, with the strong equity performance being offset by lower discount rates. Its calculations indicate the discount rate’s Treasury component decreased 12 basis points (bps) while the credit component tightened 8 bps, resulting in a net decrease of 20 bps. Overall, liabilities for the average plan increased 2.6%, while plan assets with a traditional 60/40 asset allocation rose approximately 3%.
NEPC says liability-driven investing (LDI)-focused plans that hedge interest-rate risk outpaced total-return plans, as liability-hedging assets provided protection from interest-rate declines. Based on NEPC’s hypothetical open and frozen pension plans, the funded status of the total-return plan increased by 0.5%, while the LDI-focused plan rose 1.2%. The plan is 87% hedged, as of April 30.
The average funded ratio of corporate pension plans improved in April from 94.1% to 94.8%, according to Northern Trust Asset Management (NTAM). Positive returns in equities have offset the higher liabilities due to lower discount rates. Global equity market returns were up approximately 4.4% during the month, according to NTAM, while the average discount rate decreased from 2.90% to 2.77% during the month, leading to higher liabilities.
Jessica Hart, head of the OCIO [Outsourced Chief Investment Officer] Retirement Practice, says, “Despite the reversal in the upward trajectory of interest rates this year, funded ratios have continued to improve due to the strong equity market. There are still risks to the positive trend in economic growth, but central banks remain supportive.”
Insight Investment estimated the highest gain in pension funded status in April: A 1% change from 94% to 95%. “In April, discount rates fell approximately 14 bps,” says Kevin McLaughlin, head of liability risk management, North America, at Insight Investment. “This is the first month in 2021 where discount rates fell. Asset returns across all classes in our model had positive returns, which offset the rise in liability to increase funded status 1%.”
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