Pensions See Funding Dip in November

According to the BNY Mellon Institutional Scorecard, the funded status of the typical U.S. corporate pension plan fell in November from 84.7% to 84.5 percent.

For the typical U.S. corporate plan, Aa corporate discount rates rose by 4 basis points in November, to 4.39%, which led to a 0.2% drop in liabilities. Over the course of the month, assets fell by 0.5 percentage points.

“Despite a strong October, progress once again receded in November, as uneasiness around potential Fed policy changes has started to peak with investors,” says Andrew D. Wozniak, head of BNY Mellon Fiduciary Solutions. “Still, corporate plan funded status was able to remain relatively flat, losing only 20 basis points over the course of the month. Hopefully we receive some clarity next month and a breath of stability as we head into the new year.”

Mercer’s analyses of pension plans sponsored by S&P 1500 companies finds the estimated aggregate funding level of these plans decreased by 1% to 82% as of November 30, as rates increased and equity markets were mixed. The estimated aggregate deficit of $397 billion increased by $11 billion from the end of October. Funded status is now up by $107 billion from the $504 billion deficit measured at the end of 2014, according to Mercer.

Similarly, Wilshire Consulting found the aggregate funded ratio for U.S. corporate pension plans decreased by 0.6% to 83.5% for the month of November. “The decline in funding levels was driven by a 0.8 percent decrease in asset value and a slight decrease in liability value. The asset result is due to negative returns for non-U.S. stocks as well as core and high yield bonds,” says Ned McGuire, vice president and member of the Pension Risk Solutions Group of Wilshire Consulting.

Mercer notes that the S&P 500 index stayed flat and the MSCI EAFE index dropped 1.7% in November. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased to 4.18%.

“November was able to hold most of the improvements in funded status from October, giving hope that 2015 will end up with a positive improvement in funded status when only a few months ago it looked like 2015 could be a damaging year for pension plans,” says Jim Ritchie, a principal in Mercer’s Retirement business. “Equity markets were flat while interest rates slightly increased for the month. The vast majority of the funded status improvement for 2015 has come from rising rates as equity markets have been up only slightly in 2015. While interest rates are still at historic lows, we see many plan sponsors now locking into the funded status improvement and executing on risk transfer strategies. They are looking to avoid the ever increasing cost of the variable rate PBGC premium that by 2019 will be four and a half times what it was only two years ago with the recent passage of the Bipartisan Budget Act of 2015 that raised PBGC premiums yet again.”

Wilshire Consulting’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 2015 corporate funding study. The most current month end liability growth is estimated using the Barclays Long Aa+ U.S. Corporate Index.

The assumed asset allocation used by Wilshire is 32% U.S. Equity, 21% Non-U.S. Equity, 18% Core Fixed Income, 27% Long Duration Fixed Income and 2% Real Estate.

BNY Mellon also found public defined benefit plans in November missed the Scorecard’s annualized 7.5 percent return target by 1.2%, as assets decreased by 61 basis points. Public plans are short on their year-to-date return target by 6.9%, and one-year return target by 8.7%. In addition, endowments and foundations missed their 5% monthly spending plus inflation target by 1.4%. Asset returns for the typical endowment and foundation are now down 2.4% over the past year, and fell even further behind the spending plus inflation target, to 7.6%.