S&P 500 Pensions Shortfall Increases

Decreasing rates that increased pension liability counteracted the positive effects from asset returns on the funded status of plans, Aon Hewitt says.

The aggregate pension funded status for S&P 500 firms decreased in the month of July from 83.5% to 82.8%, according to the Aon Hewitt Pension Risk Tracker.

Among private-sector defined benefit plans with glide paths in place, approximately 3% executed a de-risking transaction in July and the average size of those transactions was a 2.3% shift from return-seeking assets (e.g. equities and alternatives) to liability-hedging assets (e.g. high quality fixed income). The lack of de-risking transactions was driven by the impact of declining Treasury yields in conjunction with stagnant credit spreads, Aon Hewitt says. The few de-risking transactions were primarily a result of plan sponsor contributions.

Aon Hewitt explains that the hedge ratio is a measure of how much interest rate risk a plan sponsor is taking; and a ratio of 100% implies that nearly all interest rate risk is hedged. Among those plans with glide paths, the average hedge ratio decreased during the month from 36.8% to 35.2%.

Month-to-date pension asset returns experienced some volatility throughout the month before settling at a 1.10% return. Month-end 10-year Treasury rates dropped for the first time since the March month-end update. Month-end rates decreased 15 basis points relative to the June month-end rates, while credit spreads widened by 1 basis point. This combination resulted in a decrease in the interest rates used to value pension liabilities from 4.24% to 4.10% over the month. Given a majority of the plans in the U.S. are still exposed to interest rate risk, the decreasing rates that increased the pension liability counteracted the positive effects from asset returns on the funded status of the plan.

Year-to-date, the aggregate funded ratio improved from 81.3% to 82.8% and the funded status deficit decreased by $42 billion. According to Aon Hewitt’s estimates, this change was driven by asset reduction of $24 billion outpaced by liability reduction of $66 billion year-to-date.