Pension Funded Status Sees Recovery in December

Several firms note that the year-end market rally helped reverse a downward trend for pension funding in 2016.

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies as of December 31, 2016, returned to the same level, 82%, as it was as of December 31, 2015, according to Mercer.

Throughout most of 2016, rates and funded status remained lower than in 2015, but by the end of the year, funded status improved to the same level, Mercer notes.

However, for the year, deficits increased slightly from $404 billion at 2015 year-end to $408 billion at 2016 year-end. Interest rates decreased by 20 basis points in 2016, offsetting the positive impact of equity market gains.

Meanwhile, Aon Hewitt says, in 2016, U.S. pension plans in the S&P 500 saw the funded status deficit of their plans increase by $39 billion to $413 billion, according to the Aon Hewitt Pension Risk Tracker. The aggregate funded ratio decreased from 81.1% to 79.9%. The increase in the deficit was a result of a liability increase of $67 billion for the year that outpaced asset growth of $28 billion.

According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 0.7 percentage points to end the month of December at 81.5%, eliminating its year-to-date decline and eking out a 0.1 percentage points gain for the year.

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Wilshire Consulting says the monthly change in funding resulted from a 1.3% increase in asset values, which more than offset the 0.5% rise in liability values.  December’s improvement eliminated the year-to-date decline in funding ratios. “December marked the sixth consecutive month of either flat or rising funded ratios, which has contributed to 2016 year-end funded ratios recovering to be slightly above 2015 levels,” says Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting.  “This month’s increase was primarily driven by the continued post-election bounce in equity markets.”

Aon Hewitt found aggregate pension funded status in December remained consistent with no change from November’s month-end mark of 79.9%. Pension asset returns were positive ending the month with a 1.2% return.

The month-end 10-year Treasury rate increased 8 bps relative to the November month-end rate. Credit spreads widened by 16 bps. This combination resulted in a decrease in the interest rates used to value pension liabilities from 4.07% to 3.99% over the month.

For the fourth quarter, Aon Hewitt data shows that for S&P 500 pension plans, the aggregate funded ratio increased from 77.4% to 79.9% and the funded status deficit decreased by $79 billion. This change was driven by a liability decrease of $123 billion, which was slightly offset by asset declines of $44 billion.

Legal & General Investment Management America’s (LGIMA)’s Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical US corporate defined benefit (DB) pension plan, found pension funding ratios increased over the fourth quarter of 2016. LGIMA estimates the average funding ratio rose from 76.7% to 81.3% over the quarter.

The Pension Fiscal Fitness Monitor showed assets grew more than pension liabilities. Global equity markets increased by 1.30% and the S&P 500 increased 3.82%. Plan discount rates rose 54 basis points, as Treasury rates increased 77 basis points and credit spreads tightened 23 basis points. Overall liabilities for the average plan were down 6.07%, while plan assets with a traditional “60/40” asset allocation decreased 0.41%, resulting in a funding ratio increase of 4.6%.