DB Plan Funded Ratios Down in June and Q2

Mercer finds a 3% decline for S&P 1500 companies and Wilshire finds a 1.8% decline for S&P 500 companies for June, and LGIMA finds a 3% quarterly decline for the typical DB plan.

The aggregate funding level of defined benefit (DB) pension plans sponsored by S&P 1500 companies decreased by 3% to 76% as of June 30, according to Mercer.

Meanwhile, Wilshire Consulting reports the aggregate funded ratio for S&P 500 U.S. corporate pension plans decreased by 1.8 percentage points to end the month of June at 76.1%, the low point over the past 12 months and bringing its year-to-date decline to 5.3 percentage points.

The firms attribute the monthly decline to turbulent markets and decreased discount rates following Brexit. As of June 30, the estimated aggregate deficit for S&P 1500 plans of $568 billion increased by $70 billion as compared to the end of May. Funded status is now down by $164 billion from the $404 billion deficit measured at the end of 2015, Mercer says.

Wilshire notes that the monthly change in S&P 500 corporate pension funding resulted from a 3.5 percentage point increase in liability values partially offset by a 1.1 percentage point increase in asset values. The year-to-date decrease in funding is the result of a 10.9 percentage point increase in liability values.

“Though non-U.S. stocks posted negative returns in June, assets were up overall as fixed income assets posted their largest monthly gain since January 2015,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “The Wilshire 5000 Total Market Index gained 0.3 percentage points during the month recovering losses sustained after the British referendum vote to leave the European Union. Falling Treasury yields decreased the corporate bond yields used to value pension liabilities which led to a 3.5 percentage point increase in liability values of which over 2.5 percentage points occurred after the British referendum vote.”

NEXT: DB Funding Down for Q2 2016

Legal & General Investment Management America’s (LGIMA’s) Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, found pension funding ratios decreased over the second quarter of 2016. LGIMA estimates the average funding ratio declined from 78.8% to 75.6% over the quarter.

The Pension Fiscal Fitness Monitor showed funded ratios decreased over the quarter as pension liabilities grew more than assets. Global equity markets increased by 1.19% and the S&P 500 increased 2.46%. Plan discount rates fell 34 basis points, as Treasury rates decreased 32 basis points and credit spreads tightened 2 basis points. Overall liabilities for the average plan were up 6.0%, while plan assets with a traditional “60/40” asset allocation only increased 1.6%, resulting in a funding ratio decrease of 3.3%.

LGIMA’s Head of Solutions Strategy, Don Andrews, says: “Recent volatility in the equity and fixed income markets underscores the importance of establishing a comprehensive de-risking strategy. We continue to see significant interest from plans looking to mitigate funded ratio volatility via implementation of liability benchmarking, completion management, and option based hedging strategies, and would expect this demand to continue.”

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% global equity/40% aggregate bond (“60/40”) investment strategy, and incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.