Firms Estimate DB Funded Status Improvements in October

This is due to positive equity returns; however, plan sponsors will likely see a pension liability increase on year-end balance sheets.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 1% in October to 85%, as a result of an increase in equity markets, according to Mercer.

As of October 31, the estimated aggregate deficit of $371 billion decreased by $34 billion as compared to $405 billion measured at the end of September. “We saw the S&P 500 reach an all-time high in October, but persistently low interest rates have kept funded status from improving further. The looming question is whether we will see an end to this bull market in light of the historic run over the past decade. With low rates putting pressure on 2020 budgets, and the risk of a late-year market correction, plan sponsors should understand the sensitivity of 2020 pension liability and expense to rapidly changing market conditions,” says Matt McDaniel, a partner in Mercer’s wealth business.

River and Mercantile points out in its Retirement Update that discount rates remained relatively flat in October, only increasing 0.003%. However, current rates are still down over 1% since year-end 2018 and are 1.3% lower than rates from this time last year. The FTSE pension discount index finished October at 3.14%.

Softening trade and geopolitical tensions, as well as improving economic data, spurred a risk-on appetite. Given the rally, emerging market equities increased by 4.2%, outperforming both U.S. equities and international developed equities which returned 2.2% and 3.6%, respectively. Bond markets were primarily flat for the month, with the exception of high-yield bonds, which saw a small increase in returns at 0.5% as spreads compressed. As a result, equities and other risk assets performed well, which benefited funding levels for the month.

However, Michael Clark, director and consulting actuary at River and Mercantile, warns, “With changes in pension discount rates so far in 2019, many plan sponsors may be in for a big surprise when their year-end balance sheet pension liability has increased, even with the positive equity returns during the year. It’s imperative that plan sponsors understand how this might affect their financials with year-end just around the corner.”

Other firms also estimated an increase in defined benefit (DB) plan funded status for October, due to positive equity returns. The aggregate funded ratio for U.S. corporate pension plans increased by 1.1 percentage points to end the month of October at 86%, according to Wilshire Consulting. The monthly change in funding resulted from a 0.9% increase in asset values and a 0.3% decrease in liability values. Despite September and October’s increases, the aggregate funded ratio is estimated to be down 1.5 percentage points and 5.9 percentage points year-to-date and over the trailing 12 months, respectively.

According to Northern Trust Asset Management, the average funded ratio of corporate pension plans improved in October from 84% to 84.6%. Legal & General Investment Management America (LGIMA) estimates the average plan’s funding ratio increased 1% to 80.2% in October.

Both model plans October Three tracks gained ground last month: Plan A improved more than 1% in October but remains down more than 3% for the year, while Plan B gained less than 1% and is now close to flat through the first ten months of 2019. 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 the Aon Pension Risk Tracker, S&P 500 aggregate pension funded status increased in the month of October from 84.3% to 85.1%. However, during 2019, the aggregate funded ratio for U.S. DB pension plans in the S&P 500 has decreased from 86% to 85.1%.