Reports of Pension Funded Status for October Are Mixed

Those tracking S&P plans estimate a slight decrease in or flat pension funding ratio, while other estimate a slight increase. Most agree funding is up for the year.

The S&P 500 aggregate pension funded status decreased slightly in the month of October from 81.8% to 81.7%, according to Aon Hewitt.

Pension asset returns were positive throughout the month, ending with a 1.1 % return. However, the month-end 10-year Treasury rate increased by 5 bps relative to the September month-end rate while credit spreads narrowed by 12 bps. This combination resulted in a decrease in the interest rates used to value pension liabilities from 3.57% to 3.50%. Given a majority of the plans in the U.S. are still exposed to interest rate risk, the increase in pension liability caused by decreasing interest rates counteracted the positive effects from asset returns on the funded status of the plan.

The estimated aggregate funding status of pension plans sponsored by S&P 1500 companies remained level at 83% in October, as a result of a decrease in discount rates offset by positive equity markets, according to Mercer.

As of October 31, the estimated aggregate deficit of $387 billion represents a decrease of $5 billion as compared to the deficit measured at the end of September 2017. The aggregate deficit is down $21 billion from the $408 billion measured at the end of 2016.

The S&P 500 index gained 2.22% and the MSCI EAFE index gained 1.46% in October. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 4 basis points to 3.67%.

“While equities performed well, discount rates continue to stay near lows for the year,” says Scott Jarboe, a partner in Mercer’s Wealth business. “With equity markets at all-time highs, and with the potential for tax reform moving to the top of the political agenda, we are encouraging sponsors to take a fresh look at their pension journey.  With the potential for tax reform, we think many sponsors will consider accelerating contributions this year, which has dynamic implications on investment de-risking and risk transfer.” 

Northern Trust Asset Management reports that during the month of October, pension plans generally experienced a modest improvement as the average funded ratio increased from 82.9% to 83.0%, driven by two primary factors: Asset returns were strong as global equity markets returned over 2%; and the average discount rate decreased modestly from 3.72% to 3.69% during the month. Lower discount rates lead to higher liabilities.

The aggregate funded ratio for U.S. corporate pension plans increased by 0.4 percentage points to end the month of October at 84.7%, up 7.4 percentage points over the trailing twelve months, according to Wilshire Consulting.

The monthly change in funding resulted from a 0.9% increase in asset values partially offset by a 0.5% increase in liability values.  The aggregate funded ratio was up 3.8 percentage points year-to-date.

Legal & General Investment Management Americas (LGIMA) estimates pension funding ratios increased 0.3% over the month of October, driven primarily by gains in the equity market. LGIMA estimates Treasury rates increased 2 basis points while credit spreads tightened 7 basis points, resulting in the discount rate falling 5 basis points. Overall, liabilities for the average plan were up 0.98%, while plan assets with a traditional “60/40” asset allocation increased by 1.28%.

October Three says the big story for pension sponsors in 2017 so far is the remarkably steady increases in stocks, which have gained ground every month this year, overcoming interest rates that continue to flirt with historic lows. October saw a continuation of this pattern, improving the funded status for both model plans October Three tracks. Traditional Plan A improved 1% last month and is now up more than 4% for the year, while the more conservative Plan B improved a fraction of 1% in October and is now ahead 1% to 2% through the first ten months of 2017.

Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.