From a low of 0.4% to a high of 1.0%, firms that track defined benefit (DB) plan funding all agree that pension plan funded status increased in November.
The aggregate funded ratio for U.S. corporate pension plans increased by 1.0 percentage points to end the month of November at 85.6%, up 4.8 percentage points over the trailing 12 months, according to Wilshire Consulting. The monthly change in funding resulted from a 1.3% increase in asset values versus a 0.1% increase in liability values, the firm says.
The estimated aggregate funding status of pension plans sponsored by S&P 1500 companies also increased by 1% in November to 84% at the end of the month, as a result of both an increase in discount rates and positive equity markets, according to Mercer. As of November 30, the estimated aggregate deficit of $359 billion represents a decrease of $28 billion as compared to the deficit measured at the end of October.
Both model plans October Three tracks saw improvement in funded status last month. Traditional Plan A improved 1% and is now up almost 5% for the year, while the more conservative Plan B improved a fraction of 1% in November ahead almost 2% through the first eleven months of 2017. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.
Aon Hewitt, which tracks daily funded status of S&P 500 companies, and Legal & General Investment Management America (LGIMA), which estimates an average plan’s funded status, both estimate a funding ratio increase of 0.7% for November.
Northern Trust Asset Management’s (NTAM)’s estimate was more modest. It says, during the month of November, pension plans the average funded ratio increased from 83.0% to 83.4%, driven by two primary factors:
Asset returns were strong as global equity markets returned nearly 2%; and
The average discount rate decreased modestly from 3.69% to 3.66% during the month. Lower discount rates lead to higher liabilities.
Year-to-date DB plan funding improvement
According to NTAM, the average funded ratio of pension plans has improved from 80.0% at the beginning of year to 83.4%; as broadly positive asset returns have more than compensated for the decline in discount rate.
Aon Hewitt says year-to-date, the aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 80.9% to 82.4%. The funded status deficit decreased by $11 billion, which was driven by asset growth of $121 billion, offset by a liability increase of $110 billion year-to-date.
The aggregate funded ratio for U.S. corporate pension plans was up 4.8 percentage points over the trailing 12 months, according to Wilshire Consulting. “November marks the third consecutive month of increases in funded ratios and the seventh month for the year,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting.“Equity markets continued to rise, leading to the highest pension funded status in over three years,” says Matt McDaniel, a partner in Mercer’s Wealth business. “Plan sponsors are looking at high equity valuations and rightfully asking themselves if now is the right time to dial back risk. At the same time, looming reductions in corporate tax rates provide a strong incentive to accelerate funding. If tax reform comes to pass, we expect many plan sponsors to accelerate funding while at the same time de-risking using both investment policy and risk transfer.”