Based on data from the top 100 defined benefit (DB) plans by liability in the S&P 500, Insight Investment estimates their current funded status to be an average 83% as of November 30.
Wilshire Associates estimates that the aggregate funded ratio for U.S. corporate pension plans sponsored by S&P 500 companies increased by 1.3 percentage points month-over-month in November to end the month at 84%. November’s funded ratio resulted from a 6.3 percentage point increase in asset values partially offset by a 4.6 percentage point increase in liability values. Over longer periods, the aggregate funded ratio is estimated to have decreased by 3.1 and 5.4 percentage points year-to-date and over the trailing 12 months, respectively, primarily due to rising liability values.
“November’s funded ratio increase was primarily driven by double digit U.S. and non-U.S. public equity and real estate monthly returns, with the Wilshire 5000 Total Market Index posting multiple record highs stemming from optimism around a COVID-19 vaccine,” says Ned McGuire, managing director, Wilshire Associates. He notes that November’s funded ratio increase reverses two consecutive monthly declines in funded ratio.
River and Mercantile says an end to uncertainty surrounding the U.S. presidential election and favorable news from multiple COVID-19 vaccine developers, in addition to hope that fiscal stimulus negotiations in Congress are finally gaining momentum, are creating hope for an economic recovery in 2021. This led to extremely strong equity performance in November, both in the U.S. and internationally. Fixed income investments also had positive returns for the month.
For pension plans, the positive asset returns in November will be partially offset by liability increases, according to River and Mercantile’s Monthly Retirement Update. “Pension discount rates took one of their bigger monthly dives for the year, down 0.20% to 0.30%, bringing the total discount rate decline relative to year-end 2019 to approximately 0.70%,” the update says.
“Despite the volatility in equity markets and with interest rates, many plans many be approaching funded status levels similar to those at the beginning of the year,” says Michael Clark, managing director at River and Mercantile.
Brian Donohue, a partner at October Three Consulting, also says the stock market rally in November effectively closed a “hole” in pension finances that emerged in the first quarter, leaving plans in a position similar to where they began the year. Both model plans October Three tracks gained ground last month, with Plan A adding close to 5% and Plan B close to 2% during the month. For the year, Plan A is down less than 1% and Plan B is even. 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.
According to October Three’s Pension Finance Update, for the year, a diversified stock portfolio is now up more than 14% through November, with tech (Nasdaq) overperforming massively while international markets lag. For the year, a diversified bond portfolio has gained 10% to 13%, with long duration bonds producing the best returns.
The funded status for NEPC’s hypothetical open, or total-return, plan increased 2.6%, driven by a robust performance from equities, according to its Pension Monitor report. The funded status of its frozen, or liability-driven investing (LDI)-focused plan increased 3.8%, as gains from equities and long-duration fixed income offset a relative estimated liability increase. The plan is 80% hedged, as of November 30.
The benefits of investing in long-duration fixed income were also a theme in Northern Trust Asset Management (NTAM)’s estimate of S&P 500 pension funding ratio. “Pension plans invested in long duration bonds have experienced gains to help offset the higher liabilities from the decline in rates,” says Jessica Hart, head of the outsourced chief investment officer (OCIO) retirement practice at NTAM.
NTAM estimates that the average funded ratio of corporate pension plans improved in November from 82.1% to 84.5%. Global equity market returns were up approximately 12.3% during the month. The average discount rate decreased from 2.37% to 2.08% during the month, which led to higher liabilities.
Legal & General Investment Management America (LGIMA) estimates that pension funding ratios increased approximately 2.4% throughout November, with the impact primarily due to strong equity performance outpacing plan liabilities. LGIMA’s calculations indicate the discount rate’s Treasury component decreased 5 basis points (bps), while the credit component tightened 22 basis points, resulting in a net decrease of 27 basis points. Overall, liabilities for the average plan increased approximately 4.5%, while plan assets with a traditional “60/40” asset allocation rose approximately 7.8%, according to its Pension Solutions’ Monitor.
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