S&P Companies’ DB Funding Dipped in February

Aon Hewitt reports the S&P 500 aggregate pension funded status decreased, and Mercer says the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased.

S&P 500 aggregate pension funded status decreased in the month of February from 78.0% to 77.4% according to the Aon Hewitt Pension Risk Tracker

Pension asset returns were negative for the first half of February, before rebounding in the last two weeks and ultimately settling at a 0.60% return for the month, according to Aon Hewitt.

The month-end 10-yr Treasury rate dropped 20 bps relative to the January month-end rate, while credit spreads widened by 13 bps. This combination resulted in a decrease in the interest rates used to value pension liabilities from 4.23% to 4.16% 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 for the S&P 500 decreased from 80.0% to 77.4%, and the funded status deficit increased by $57 billion. According to Aon Hewitt’s estimates, this change was driven by an asset reduction of $41 billion along with liability growth of $16 billion year-to-date.

Mercer says the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by one percent to 78% as of February 29, 2016, as a result of negative equity markets and a decrease in discount rates. As of February 29, 2016, the estimated aggregate deficit of $487 billion increased by $15 billion as compared to the end of January. Funded status is now down by $83 billion from the $404 billion deficit measured at the end of 2015, according to Mercer.

Mercer notes that the S&P 500 index dropped 0.4% and the MSCI EAFE index dropped 2.1% in February. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 10 basis points to 4.03%.

“Despite the long-awaited interest rate increase announcement from the Fed in December, discount rates for pensions are actually lower now than they were prior to the Fed’s action, putting downward pressure on funded status,” says Matt McDaniel, a partner in Mercer’s retirement business. “This underscores the point that the dynamics of long corporate bond markets are quite different than the short term rates generally targeted by the Fed. We believe plan sponsors are well advised to have a strategy that can be nimble enough to react to bond markets, ensuring that any opportunities are capitalized upon.”