Market Selloff Pushes Down DB Plan Funding

Entities that monitor defined benefit (DB) plan funded status noted that the decline could have been worse had interest rates not increased and pushed down plans’ liabilities.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by 2% in October to 90%, primarily as a result of a decrease in equity markets, according to Mercer.

As of October 31, 2018, the estimated aggregate deficit of $208 billion increased by $37 billion as compared to $171 billion measured at the end of September.

The S&P 500 index decreased 6.8% and the MSCI EAFE index decreased 8% in October. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 23 basis points to 4.43%.

“Pension funded status dropped sharply during October despite increases in interest rates,” said Scott Jarboe, a partner in Mercer’s Wealth business. “October was a reminder of how quickly funded status can drop as we saw declines in equity markets and an increase in volatility during the month. Following five-year funded status highs in September, we suggest plan sponsors review their risk management policies to understand the impact of continued volatility and consider actions to protect funded status gains that have been realized.”

According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans decreased by 1.9 percentage points to end the month of October at 89.6%. The monthly change in funding resulted from a 5.7% decrease in asset values partially offset by a 3.7% decrease in liability values.  The aggregate funded ratio is up 5 percentage points both year-to-date and over the trailing twelve months. 

“October saw a sharp decline in funded ratios caused by the worst percentage loss for the Wilshire 5000 since September 2011 which the increase in bond yields used to value corporate pension liabilities could not fully offset,” said Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting.  “October’s 1.9 percentage point decrease in funding was the largest pull back since a 2.1% decline in June 2016 and brings the aggregate funded ratio back under 90%. Despite the drop, the funding level is still 5.0 percentage points higher year-to-date,” he added.

Northern Trust Asset Management (NTAM) said that during the month of October, the average funded ratio for S&P 500 corporations with defined benefit (DB) plans declined from 90.7% to 88.6%. The market downturn more than offset the decline in liabilities from higher discount rates.

According to NTAM, the average discount rate increased from 3.92% to 4.16% during the month, and global equity markets were down approximately 7.5% during the month.

Legal & General Investment Management America (LGIMA) said pension funding ratios decreased to 89.6% through the month of October due to the negative returns in both U.S and global equity markets.

It says, however, that the Treasury component increased by 18 basis points and the credit component increased by 5 basis points, resulting in the discount rate used to measure pension liabilities increasing 23 basis points. Overall, liabilities for the average plan decreased approximately 2.7%, while plan assets with a traditional 60/40 allocation declined by 4.8%.

According to October Three, in October, stock markets gave back most of what they had earned this year. Interest rates softened the blow a bit, but both model plans it tracks suffered their worst month of the year, with traditional Plan A dropping almost 4% and the more conservative Plan B losing almost 2%. For the year, however, Plan A remains 5% up and Plan B is ahead a fraction of 1%.

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.