The funded status of U.S.-based corporate pension plans increased significantly in February, primarily due to a rally in technology stocks, driven by excitement over AI and semiconductors, according to industry reports. Funded status also continues to be boosted by heightened interest rates.
The surplus in pension funding could have some plan sponsors considering what to do with their excess pension assets. Earlier this month, Eastman Kodak announced it would shut its investment office, shifting the management of its assets to NEPC LLC, and is reportedly considering how best to utilize its $1.2 billion pension surplus.
Agilis
Pension discount rates increased for a second month in a row in February, resulting in a decrease in liabilities for corporate plans, according to actuary and investment consultant Agilis’s monthly pension briefing. These liabilities decreased between 1.8% and 2.8% in February.
“February was another good month for pension plan sponsors as discount rates increased and equity markets were positive,” Michael Clark, managing director at Agilis, said in a statement with the report. “The primary driver for discount rate increases was the increase in Treasury yields over the month as the market is not anticipating any rate cuts from the Fed in the short-term.” director at Agilis in the report.
U.S. equities were the highest performing, while developed foreign market equities delivered modest returns in February, the firm noted.
“Equity markets were strong across the globe, with the S&P 500 up over 5% during the month,” Clark said. “Continued equity growth has been helped by the Fed posturing rate cuts later in the year, inflation that was in line with expectations, and a continued resilience in the labor market. Whether or not these trends continue is anyone’s guess, but as we’ve said before expect 2024 to be a volatile ride with markets and rates.”
WTW
According to WTW’s Plc’s Pension Index, which tracks the financial performance of a hypothetical 60/40 portfolio, the index increased to 113.0 by the end of February, which is the highest it has been since January 2001. This is a 3.8% increase over January.
Equities in the hypothetical portfolio returned 4.8% during the month, while fixed income returned negative 1.2%. A decrease in liabilities was due in part to the increase in discount rates. Combined with returns, these were responsible for the month’s strong upswing in funded status, according to WTW.
LGIM America
LGIM America’s Pension Solutions Monitor, which tracks a hypothetical corporate defined benefit plan with a 50/50 asset allocation, reported that its funded ratio rose to 107.3% in February, up from 103.9% in January.
Equities, which rose 4.3% in the month, boosted plan returns. Discount rates increased 27 basis points, and plan assets with a 50/50 asset allocation increased 0.9%, with liabilities decreasing 2.2%.
October Three
October Three Consulting attributes strong pension performance in February to strong equity markets as well as higher interest rates. October Three tracks the hypothetical performance of two separate plans in its monthly pension finance update.
Plan A, a traditional 60/40 portfolio, returned 5% in February, while Plan B, a largely retired plan with a 20/80 asset allocation, returned 1% during the month.
Equities returned 5% according to October Three’s tracker, while bonds returned between negative 2% and 4%. Combined with pension discount rates that increased 0.2% in February, Plan A, the equity-heavy portfolio, significantly outperformed its 20/80 counterpart, returning 2% through the first two months of the year, while Plan B returned negative 1% during that time period.
Wilshire
Wilshire found the aggregate funded ratio for U.S. corporate plans increased 3.4% in February to 109.4%, the fourteenth consecutive month-over-month increase in pension funding surplus, according to the firm’s data.
“U.S. corporate pension plans have maintained their overfunded status for 14 consecutive months since early 2023,” Ned McGuire, managing director at Wilshire in the firm’s monthly pension plan funding status report, said in a statement in the report. “February’s increase in funded status was attributed to a decline in liability values, driven by a nearly 30 basis point rise in corporate bond yields and an increase in asset values.”
Wilshire attributed the increase in pension funding to strong equity returns, as well as a 2.8% decrease in the liability of plan assets, and a 0.2% increase in the value of those assets.
“The FT Wilshire 5000, along with other major equity indices, achieved all-time highs in February, countering negative bond returns caused by rising fixed income yields,” McGuire continued “The positive trend in asset and downward trend in liability values has the estimated funded ratio at its highest since Wilshire began tracking in late 2014.”
Milliman
Funded status among the largest 100 U.S. corporate pension plans rose to 104.9% at the end of February, according to the Milliman 100 pension funding index, from 102.8% in January.
Funded status was driven by rising discount rates, which in February increased 21 basis points to 5.35%. Plan liabilities decreased by $30 billion, while plan assets declined $4 billion to $1.349 trillion during the month of February.
“After discount rates dropped significantly at the end of 2023, the past two months of rising rates and corresponding funded status gains have added to the PFI plans’ funding surplus,” Zorast Wadia, principal and actuary consultant at Milliman, said in a statement in the PFI report. “However, with expectations of rate cuts later in the year, it’s possible these gains may be short-lived unless plan sponsors adhere to matching asset-liability strategies to control rate volatility.”
In Milliman’s optimistic forecast, one in which discount rates increase to 5.85% at the end of 2024 and 6.45% at the end of 2025, with asset returns of 9.8%, funded status of these corporate plans would increase to 116% by year end 2024 and 130% by year end 2025.
In the firm’s pessimistic forecast, with discount rates declining to 4.85% and 4.25%-year end 2024 and 2025 respectively, with 1.8% annualized returns, the funded status of these plans would decline to 97% year-end 2024, and 88% by year-end 2025.
Insight Investment
The funded status of U.S. corporate plans increased to 111.7% in February, an increase from 108.2% the previous month, according to Insight Investment. The asset manager attributed this increase to a 22-basis point increase in pension discount rates, and positive returns from growth assets. According to Insight, asset returns were 0.5%, while liability returns were negative 2.6%.
Insight Investment noted that there have been increased discussions about what to do with excess pension surpluses.
“Considering last month’s strong performance, sponsors may be able to take risk off the table and remain on track to meet their long-term funded status objectives,” Ciaran Carr, head of the client solutions group, North America, said in a statement in the report. “We are also seeing an increased dialogue around surplus management from pension plans that are near or above fully funded levels.”
Aon
The funded status of U.S. pension plans of companies in the S&P 500 increased to 104.2% in February, from 101.8% the month before, according to Aon plc’s pension risk tracker, which tracks the daily funded status of defined benefit plans for those businesses.
This increase in funded status represents an increase of $51 billion in plan assets. Liabilities decreased $68 billion, while assets decreased $17 billion, according to the consulting firm.
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Tags: Agilis, Aon, Insight Investment, Legal & General Retirement America (LGIMA), Milliman, Ned McGuire, October Three Consulting, Wilshire, WTW, Zorast Wadia
