DB Plan Funded Status Remains Stable in May

Consultants say now is the time to evaluate interest rate and equity market risk strategies, as well as whether and how to take advantage of pension funding relief legislation passed in March.

The aggregate funded ratio for U.S. defined benefit (DB) pension plans sponsored by S&P 500 companies increased by an estimated 0.1 percentage point month-over-month in May to end the month at 94.2%, according to Wilshire.

The monthly change in funding resulted from a 0.6 percentage point increase in asset values partially offset by a 0.7 percentage point increase in liability values. The aggregate funded ratio is estimated to have increased by 6.4 and 13.5 percentage points year-to-date and over the trailing 12 months, respectively.

Never miss a story — sign up for PLANSPONSOR newsletters to keep up on the latest retirement plan benefits news.

“May marks the seventh consecutive month of funded ratio increases, tying for the longest such streak since August 2016 to March 2017, when the funded ratio increased by 7.3 [percentage points] from 75.9% to 83.2%,” says Ned McGuire, managing director, Wilshire. “May’s funded ratio is at its highest level since Wilshire has been aggregating data for U.S. corporate pension plans on a monthly basis and since Wilshire’s 2007 corporate funding study on an annual basis.”

Insight Investment estimates a corporate DB plan funded status of 95% as of May 31. In May, discount rates fell approximately 4 basis points (bps), leading to a slight increase in DB plan liability, and modeled asset returns were flat, resulting in no material change in funded status, it says.

Northern Trust Asset Management (NTAM)’s May pension funded report shows a small improvement in DB plan funded status from April, from 94.8% to 95.0%. Positive returns in global equities–of 1.6%–offset the higher liabilities due to lower discount rates, where the average decreased from 2.77% to 2.73%.

“While rates declined during the month, funded ratios remained steady due to positive equity returns,” says Jessica Hart, head of the outsourced chief investment officer (OCIO) retirement practice at NTAM. “Central bank accommodation and recent solid economic data helped offset inflation concerns. The Fed remains clear in its view that inflation is transitory and that the U.S. economy is far from full employment.”

NEPC says that despite fears of rising inflation, it maintains its recommendation to adhere to plan hedge ratios and long-term strategic target allocations. The firm says it is keeping an eye on legislation that could increase the corporate tax rate, affecting tax-deductible pension contributions.

NEPC’s Pension Monitor says total-return plans with higher equity allocations may have outpaced liability-driven investing (LDI)-focused plans, depending on the plan liability duration. Based on NEPC’s hypothetical open- and frozen-pension plans, the funded status of the total-return plan increased by 0.4%, while the LDI-focused plan rose 0.6%.

LGIM America estimates that pension funding ratios increased approximately 0.3% throughout May, primarily due to strong equity performance. Its May Pension Solutions’ Monitor says that, overall, liabilities for the average plan increased 0.7%, while plan assets with a traditional “60/40” asset allocation rose approximately 1.1%.

Both model plans October Three tracks saw a second consecutive flat month in May. However, through the first five months of 2021, Plan A is up more than 11% while the more conservative Plan B has improved 3%. 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.

Brian Donohue, a partner at October Three Consulting, notes that pension funding relief was signed into law in March. “The new law substantially relaxes funding requirements over the next several years, providing welcome breathing room for beleaguered pension sponsors,” he says.

Michael Clark, managing director and consulting actuary with River and Mercantile, says DB plan sponsors will want to consider how those regulations will allow them to optimize their contribution strategies for 2021 and the coming years. He adds that with the current funding stability, “now is a good time for plan sponsors to evaluate their overall funded status risk profile, including ways to manage interest rate and equity market risk.”

River and Mercantile’s U.S. pension briefing for May says it’s likely that DB plans with various liability profiles and investment strategies had a quiet month when it comes to funded status. “Most plans will have seen only modest excess liability growth, which will have been largely offset by asset performance. Whether the net impact is positive or negative will depend on the plan, but, in most cases, the changes will be small,” it states.

Aon’s Pension Risk Tracker shows S&P 500 aggregate pension funded status decreased in the month of May from 92.9% to 92.5%. “Given a majority of the plans in the U.S. are still exposed to interest rate risk, the increase in pension liability caused by decreasing interest rates offset the positive effect of asset returns on the funded status of the plan,” Aon says.

However, during 2021, the aggregate funded ratio for U.S. pension plans in the S&P 500 has increased from 87.9% to 92.5%, according to the Aon. The funded status deficit decreased by $119 billion, which was driven by liability decreases of $139 billion, partially offset by asset decreases of $20 billion year-to-date.