The aggregate pension funded status for S&P 500 firms rose in October, from 78.7% to 80.8%, according to the Aon Hewitt Pension Risk Tracker. Year to date, the funded status deficit has increased by $3 billion.
Month-to-date pension asset returns were strong throughout October, yielding a 3.6% return. The month-end 10-year Treasury rate increased 10 basis points relative to September’s month-end rate, while credit spreads narrowed by 14 basis points. This combination resulted in a decrease in the interest rates used to value pension liabilities from 4.15% to 4.11% over the month. Given that a majority of U.S. plans are still exposed to interest rate risk, the decreasing rates that increased the pension liability marginally counteracted the positive effects from asset returns on the funded status of the plan.
Year to date, the aggregate funded ratio decreased, from 81.3% to 80.8%. According to Aon Hewitt’s estimates, this change was driven by a liability reduction of $67 billion, which outpaced the asset reduction of $64 billion year to date.
“While the funded status of U.S. pension plans continues to improve, the recently passed Balanced Budget Act of 2015 provides additional funding flexibility in future years, presenting a prime opportunity for sponsors to review their funding strategies,” says Ari Jacobs, senior partner and global retirement solutions leader at Aon Hewitt. “Despite the improving funded position of U.S. pension plans, the Act also increases PBGC premiums. These increases should be taken into account as plan sponsors review the strategic alternatives around their pension plans.”
The Aon Hewitt Pension Risk Tracker tracks the daily funded status of 360 S&P 500 companies with defined benefit pension plans.