DB Plan Funded Status Moving in the Right Direction

Several analyses show funded status improvement for the month of March as well as the first quarter.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 1% to 83% in March, as an increase in discount rates was partially offset by mixed equity markets, according to Mercer. As of March 31, 2017, the estimated aggregate deficit of $391 billion represents a decrease of $9 billion as compared to the deficit measured at the end of February. The aggregate deficit is down $17 billion from the $408 billion measured at the end of 2016.

The S&P 500 index remained nearly level and the MSCI EAFE index gained 2.3% in March. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 8 basis points to 4.01%.

“Plan sponsors should consider re-evaluating their risk appetites in these uncertain times. Despite the Federal Reserve’s indications that short term rates may steadily increase in the near future, there is still quite a bit of uncertainty on what will happen with long-term rates and equity markets, which are two main factors that affect the funded status of pension plans, says Jim Ritchie, a partner in Mercer’s wealth business. “Those plan sponsors that are relying on long-term rates to rapidly rise in the near future may continue to be frustrated with the lack of progress on their funded status. Plan sponsors should look at multiple future economic conditions to get a good perspective on the future financial condition of their pension plans.”

Wilshire Consulting also estimates a nearly 1% increase in corporate pension plans’ funding status in March.

The aggregate funded ratio for U.S. corporate pension plans increased by 0.9 percentage points to end the month of March at 83.9%, up more than 6 percentage points over the trailing twelve months, according to Wilshire.

The monthly change in funding resulted from a 0.9% decrease in liability values while asset values remained relatively flat. For the quarter, the aggregate funded ratio is up 2.0 percentage points from 81.9% at the end of 2016.

“March marked the seventh consecutive month of rising or flat funded ratios, which has contributed to March month-end funded ratios being the highest since October 2015,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “This month’s increase was primarily driven by the decrease in liability values caused by the 9 basis points rise in corporate bond yields used to value pension liabilities.”

NEXT: Funded status for Q1 rises

The aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 80.9% to 82.1% year-to-date, according the Aon Hewitt Pension Risk Tracker

The funded status deficit decreased by $22 billion, which was driven by asset growth of $35 billion and offset by a liability increase of $13 billion year-to-date. Pension liabilities increased by 0.6% as rates declined. Ten-year Treasury rates were down by 5 bps over the quarter and credit spreads narrowed by 1 bp, resulting in a 6 bps decrease in the discount rate over the quarter for an average pension plan.

Aon Hewitt notes that return-seeking assets were prosperous during the first quarter, with the Russell 3000 Index returning 5.7%. Equities outperformed bonds during the quarter, with the Barclay’s Long Gov/Credit Index returning 1.6% over this timeframe. Overall pension assets returned 3.3% over the quarter.

Meanwhile, according to Legal & General Investment Management America’s (LGIMA) Pension Fiscal Fitness Monitor, the pension funding ratio of a typical U.S. corporate defined benefit (DB) plan rose from 81.3% to 83.9% over the quarter.

The Pension Fiscal Fitness Monitor showed funded ratios increased over the quarter as assets grew more than pension liabilities. Global equity markets increased by 7.05% and the S&P 500 increased 6.07%. Plan discount rates fell 1 basis point, as Treasury rates decreased 4 basis points and credit spreads widened 3 basis points.

Overall liabilities for the average plan rose 1.27%, while plan assets with a traditional “60/40” asset allocation increased 4.53%, resulting in a funding ratio increase of 2.61%.

LGIMA’s Head of Solutions Strategy, Don Andrews, says, “We estimate that funded ratio levels for the typical plan with a traditional asset allocation increased primarily due to assets outperforming the liabilities. Equity markets experienced a strong rally and fixed income assets remained relatively stable, with liability values increasing slightly. This contributed positively to the funded ratio.”

He adds, “We are seeing renewed interest in hedging interest rate risk from many plan sponsors looking to lock in these funding ratio gains after benefiting from a large gain in equities. In particular, plan sponsors are considering customized LDI strategies such as liability benchmarking, completion management and option-based hedging strategies.”