The month of November has positively affected defined benefit (DB) plan funding ratios given the dramatic sell-off in rates, tighter credit spreads, and a rally in U.S. equities since the election results, according to Legal & General Investment Management America (LGIMA).
LGIMA estimates that pension funding ratios increased 3.4% since the end of October. Global equity markets increased by 0.8%. LGIMA estimates plan discount rates rose 37 basis points, as Treasury rates rose 47 basis points while credit spreads tightened 10 basis points. Overall, liabilities for the average plan were down 4.6%, while plan assets with a traditional “60/40” asset allocation decreased by 0.5%. Plans with equity allocation to the S&P 500 saw their funding ratios increase by approximately 4.8%.
Mercer also found the estimated aggregate funding deficit of pension plans sponsored by S&P 1500 companies reduced by 20% during the month of November. This brought current funded status to 81% at the end of November, as an increase in discount rates was mildly offset by mixed equity markets.
As of November 30, the estimated aggregate deficit of $414 billion represents a decrease of $116 billion as compared to the end of October. However, the aggregate deficit is still up $10 billion from the $404 billion deficit measured at the end of 2015, according to Mercer.
The S&P 500 index gained 3.4% and the MSCI EAFE index lost 2.2% in November. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 45 basis points to 4.11%.
“The surprising election win by Donald Trump appears to have started the long awaited increase in long term interest rates which has greatly increased the funded status of pension plans,” says Jim Ritchie, partner, Mercer’s Retirement business. “Donald Trump’s promises of lower taxes and higher infrastructure spending are being credited for the recent increase in long term rates, which are up approximately 40 basis points since the election. Plan sponsors should take a serious look at their de-risking strategies with the focus on whether this rise in rates is temporary or a long term trend. Either way, plan sponsors will want to have a solid strategy in place to take advantage of these higher rates.”
According to Wilshire Consulting, the aggregate funded ratio for U.S. corporate pension plans increased by 3.3 percentage points to end the month of November at 80.6%, nearly eliminating its year-to-date decline to 0.8 percentage points.
The monthly change in funding resulted from a 5.2% drop in liability values significantly offsetting the 1.2% decrease in asset values. This narrowed the year-to-date decline in funding ratios, which has been driven by a nearly 6% increase in liability values.
Wilshire also pointed to the post-election stock and bond market activity as boosting pension funding.Meanwhile, both model pension plans tracked by October Three enjoyed strong improvements in funded status during November—Plan A improved by 5% and Plan B by more than 1% last month—pushing both plans into positive territory for the year, up almost 1%.