Increase in Discount Rates Tempered DB Funded Status Losses in February

Institutions that track defined benefit (DB) plans’ funded ratios measured increases or decreases in funded status as high as 1%, but noted it could have been worse if not offset by higher liability discount rates.

Conning notes that over February, the average (Russell 3000) defined benefit (DB) plans’ funded status fell by 1% (87% to 86%). This was after January saw one of the largest increase in funded status in recent history (83% to 87%).

Owais Rana, Conning’s head of Pension LDI Solutions, explains that this was due to a fall in all global equity markets (approx. 4%.). However, an increase in the liability discount rate of 23 bps from 3.65% up to 3.88% reduced the average plans’ liability value which negated most of the loss on assets.

October Three also notes that February was a difficult month for investments, but a so-so month for pension finance due to higher interest rates. Both model pension plans it tracks were close to flat last month. 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.

Legal and General Investment Management America (LGIMA) estimates that the average plan’s funding ratio increased 0.2% during the month.

Meanwhile, according to Mercer, the estimated aggregate funding status of pension plans sponsored by S&P 1500 companies increased by 1% in February to 88% at the end of the month, as a result of a significant increase in discount rates which more than offset losses in the equity markets. As of February 28, the estimated aggregate deficit of $262 billion decreased by $29 billion as compared to the $291 billion measured at the end of January.

The S&P 500 index decreased 3.9% and the MSCI EAFE index decreased 4.7% in February. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 23 basis points to 3.97%.


“Volatility continued in February, and equities ended down by around 4% for the month—which marked the first significant month over month decrease in over a year.” says Scott Jarboe, a partner in Mercer’s wealth business. “Aggregate funded status still saw some improvement due to an increase in discount rates by over 20 basis points.  Clients are beginning to look carefully at plans in 2018, and we expect to see some evolution in the context of tax reform and market volatility.” 


S&P 500 aggregate pension funded status decreased in the month of February from 84.2% to 83.5%, according to Aon’s Pension Risk Tracker. Year-to-date, the aggregate funded ratio for U.S. pension plans in the S&P 500 improved from 81.8% to 83.5%,


According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans decreased by 0.7 percentage points to end the month of February at 88.2%, and up 6.1 percentage points over the trailing twelve months.


The monthly change in funding resulted from a 3.3% decrease in liability values, which was more than offset by a 4.1% decrease in asset values.  Despite February’s decline, the aggregate funded ratio is up 3.6 and 6.1 percentage points year-to-date and over the trailing twelve months, respectively. 


“February’s month end funded ratio is the second highest in over four years despite the decline,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. 


Northern Trust Asset Management says the average funded ratio for corporate pension plans decreased modestly from 86.3% to 85.7% for the month.