River and Mercantile notes that long-term corporate bond yields stayed relatively flat in November and U.S. stock prices moved higher. “With liability discount rates remaining level and an increase in U.S. equity markets, most [pension] plans should have seen a slight increase in funded status for the second month in a row,” the firm says in its Monthly Retirement Update for December.
It’s true that firms that track defined benefit (DB) plan funded status recorded a slight increase of about 1%. The aggregate funded ratio for U.S. corporate pension plans increased by one percentage point to end the month of November at 86.8%, according to Wilshire Consulting. Likewise, Mercer estimated the aggregate funding level of pension plans sponsored by S&P 1500 companies increased by one percentage point in November to 86%.
Mercer says this is the result of an increase in equity markets and a slight increase in discount rates. Ned McGuire, managing director and a member of the Investment Management & Research Group of Wilshire Consulting, notes, “November’s one percentage point increase in funded ratio is the third consecutive and seventh monthly increase this year.”
According to Mercer, as of November 30, the estimated aggregate deficit of $351 billion for S&P 1500 companies decreased by $20 billion as compared to $371 billion measured at the end of October.
Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased throughout November, with changes driven primarily by the rise in U.S. Treasury yields and global equity performance. Its calculations indicate the discount rate’s Treasury component increased by five basis points while the credit component tightened seven basis points, resulting in a net decrease of two basis points. Overall, liabilities for the average plan increased 0.51%, while plan assets with a traditional “60/40” asset allocation increased by approximately 1.78%.
Despite the past three monthly increases in funded ratio, the aggregate funded ratio as tracked by Wilshire Consulting is estimated to be down 0.7 and 6.1 percentage points year-to-date and over the trailing 12 months, respectively.
October Three’s November 2019 Pension Finance Update also shows both model plans it tracks gained ground last month, but are not up for the year. Plan A improved more than 1% in November but remains down 2% for the year, while Plan B gained less than 1% and is now even through the first eleven months of 2019. 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.
Still, Brian Donohue, partner at October Three Consulting, says, “Pension finances have held up pretty well this year in the face of all-time low interest rates, thanks to continued strong stock market returns.”
According to Northern Trust Asset Management (NTAM), the average funded ratio of corporate pension plans improved in November from 84.6% to 85.7%. Jessica Hart, head of OCIO Retirement Practice at NTAM, notes, “Despite continued equity market strength, few pension plans have been able to de-risk this year as average funded ratios still remain below where they were at the beginning of the year. As plan sponsors look towards 2020, they will need to consider the implications of a continued low rate and potentially low return environment.”
Michael Clark, managing director at River and Mercantile, says, “Even though rates have ended the last three months relatively flat, there has been noticeable interest rate volatility intra-month. Based on early economic indicators in December (a better than anticipated jobs report and historically low unemployment rates) equities and interest rates are both up in December—for now. Those could both easily change, and change quickly, based on other economic or geopolitical news throughout the month.”
In the earlier stages of a DB plan’s glidepath, LGIMA recommends using market-based benchmarks. As the plan moves to hedge liabilities, LGIMA recommends customizing the Treasury allocation to reduce funded status volatility, and ultimately it suggests customizing the credit allocation as well to align more closely with the plan’s liability.
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