The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies increased by 1% to 79% as of May 31, 2016, as discount rates increased and equity markets were relatively flat, according to Mercer.
Wilshire Consulting reports the aggregate funded ratio for U.S. corporate pension plans decreased by 0.7 percentage points to end the month of May at 76.8%, matching the low point over the past 12 months and bringing its year-to-date decline to 4.6 percentage points.
Mercer data shows that as of May 31, 2016, the estimated aggregate deficit for S&P 1500 companies of $498 billion decreased by $6 billion as compared to the end of April. However, the aggregate deficit remains up by $94 billion from the $404 billion deficit measured at the end of 2015.
The S&P 500 index gained 1.5% and the MSCI EAFE index lost 1.5% in May, Mercer notes. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by two basis points to 3.75%.
”The month of May continues the trend of low interest rates and underwhelming equity returns” says Jim Ritchie, partner, Retirement, Mercer. “As we have said for a while now, plan sponsors should consider adapting their pension management policies to include the possibility that long-term rates may stay low for quite some time into the future and that the risk premium for equities may not make a significant improvement in funded status anytime soon. Plan sponsors should continue to consider risk transfer and LDI strategies as effective risk management tools in the short-term.”
Wilshire says the monthly change in funding it reported resulted from a 0.8% increase in liability values versus relatively flat asset values (-0.1%). The year-to-date decrease in funding is the result of an 8.6% increase in liability values.
Wilshire’s aggregate figures represent an estimate of the combined assets and liabilities of corporate pension plans sponsored by S&P 500 companies with a duration in-line with the Citi Group Pension Liability Index – Intermediate. The funded ratio is based on the CPLI – Intermediate liability, with service cost, benefit payments and contributions in-line with Wilshire’s 2016 corporate funding study. The most current month end liability growth is estimated using the Barclays Long Aa+ U.S. Corporate Index.