The aggregate funded ratio for U.S. corporate pension plans increased by an estimated 1.7 percentage points month-over-month in January to end the month at 88.5%, according to Wilshire Consulting. The 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 FTSE Pension Liability Index – Short.
Wilshire notes that the monthly change in funding resulted from a 3.5 percentage point decrease in liability values partially offset by a 1.6 percentage point decrease in asset values. The aggregate funded ratio is estimated to have increased by 3.6 percentage points over the trailing 12 months.
So far this year, the aggregate funded ratio for U.S. pension plans in the S&P 500 has increased from 91.5% to 91.8%, according to the Aon Pension Risk Tracker. The funded status deficit decreased by $11 billion, which was driven by liability declines of $43 billion, partially offset by asset decreases of $32 billion year-to-date.
The average funded ratio of corporate pension plans improved in January from 86.4% to 87.9%, according to Northern Trust Asset Management (NTAM). Slightly negative returns in equities were more than offset by the increase in discount rates, which led to higher funded ratio. Global equity market returns were down approximately 0.4% during the month. The average discount rate increased from 2.1% to 2.32% during the month, leading to lower liabilities.
Legal & General Investment Management (LGIM) America’s January Pension Solutions’ Monitor estimates that pension funding ratios increased approximately 1.5 percentage points throughout January, with the impact primarily due to higher Treasury yields driving liability values lower. Although plan assets with a traditional 60/40 asset allocation decreased slightly, they did not fall as much as liabilities.
River and Mercantile says that what’s included in a defined benefit (DB) plan’s investment portfolio mattered in January. Its “US pension briefing – January 2021” report says, “Equities experienced a quiet month relative to the last few. Fixed income investments were generally down, corresponding to the increase in interest rates. Pension plan returns for the month will depend largely on the plan’s equity makeup, with minimal to negative returns expected for most plans. Combining interest rate and investment market movements, most pension plans will see their funded status improve for the month, but only modestly.”
Plans with modest to significant fixed income investments had a relatively flat funded status for the month, as plan liabilities and assets decreased slightly together, River and Mercantile says. Plans with more significant equity holdings generally saw a funded status improvement, but it was driven mainly by decreasing liabilities rather than by equity returns.
“While equities were a mixed bag, interest rates were the driving force behind funded status movements in January with discount rates increasing upward of 0.20%,” says Michael Clark, managing director and consulting actuary with River and Mercantile.
In January, the funded status of a typical corporate pension plan rose as increasing discount rates overrode a small pullback in equity markets, NEPC notes in its January 2021 Pension Monitor. Reiterating that an investment portfolio’s makeup matters, NEPC says total-return plans outpaced liability-driven investing (LDI)-focused plans that hedge interest rate risk. While spreads remained largely flat for the month, the Treasury curve steepened, reducing estimated liabilities. Based on NEPC’s hypothetical open- and frozen-pension plans, the funded status of the total-return plan increased by 2.3%, while the LDI-focused plan saw an increase of 0.2%.
Both Clark and Brian Donohue, a partner at October Three Consulting, note that the Emergency Pension Plan Relief Act of 2021 (EPPRA), introduced by House Representative Richard Neal, D-Massachusetts, would provide some funding relief for single-employer DB plans. “Under current law, liabilities will increase substantially for 2021to 2023. Plans that have only made required contributions in the past can expect significant increases in required contributions over the next couple years,” Donohue says. “The progress of this legislation will be crucial to pension decisionmaking in the months ahead.”
According to October Three’s January 2021 Pension Finance Update, higher interest rates gave pension finance a boost in January. Both model plans it tracks gained ground last month, with Plan A improving 2%, while the more conservative Plan B gained less than 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 and a greater emphasis on corporate and long-duration bonds.
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