Robust June in Stocks Puts an ‘Exclamation Point’ on Pension Funding

U.S. corporate funding levels stay high as the likelihood grows of an interest rate cut later this year.




The overall improvement in pension funding ratios in June across multiple indices and reports highlights the continuation of a positive trend for U.S. corporate defined benefit pension plans, with results driven by strong market performance, favorable economic indicators and, for the moment, high interest rates.
 

June was less of a standout for a year of strong funded status for DB plans than a reminder to take advantage of the current run of strength, while having an “appreciation for what might happen” when rates drop, says Scott Jarboe, U.S. defined benefit segment leader of Mercer’s wealth leadership team. 

“This month is not different from many of the previous months,” he says. “But we have hit another high watermark, so it’s just an exclamation point behind ‘pay attention to that risk and make sure that you understand the downside.’” 

Mercer reported that the estimated aggregate funding level of pension plans sponsored by S&P 500 companies rose by 1% in June 2024 to 109%. The domestic equity market’s increase partially offset the decrease in discount rates. By June 30, the estimated aggregate surplus of $136 billion had risen by $17 billion from the previous month. 

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On Thursday, the Consumer Price Index released its results from June, falling .01% from May and helping to slow the annual rate of inflation to 3% from 3.3% in May, according to the Bureau of Labor Statistics. That drop may provide further fodder for a Federal Reserve pondering an interest rate drop in coming months, depending on economic factors that also include the labor market.  

Mercer’s Jarboe says there have been many periods in the past when funded statuses have been elevated, only to be followed by rate environment changes that lead to relatively rapid declines. Sponsors and advisers should ensure clients have opportunistically taken that risk off at the table, as funded status is now in a “good place,” he notes. 

Healthy DB Plans 

In line with Mercer’s findings, LGIM America’s Pension Solutions Monitor reported that the health of a typical U.S. corporate defined benefit pension plan saw improvements throughout June. The average funding ratio increased to 109.9% from 108.8%, driven by favorable market conditions. 

October Three Consulting also reported a positive end to June, as both model plans tracked by the firm experienced gains. Plan A improved by nearly 1% in June, ending the first half of the year up by more than 8%. Plan B also saw a gain of nearly 1% for June and is now up by 2% year-to-date. 

Wilshire estimated an increase in the aggregate funded ratio for U.S. corporate pension plans by 1.1 percentage points in June, ending the month at 102.3%. This improvement was driven by a 1.0% increase in asset value without significant changes in liability value.  

Despite a 1.1 percentage point decrease over the past 12 months, the funded ratio has increased by 6.5 percentage points year-to-date and 2.6 percentage points in the second quarter, according to the firm. Wilshire’s FT Wilshire 5000 Index returned more than 3% in June and more than 13% in the first half of 2024. 

Goldman Sachs estimated the end of June’s funding ratio at 107%. Mike Moran, a senior pension strategist at Goldman Sachs Asset Management, attributed the improvement to continued strength in equity markets and higher yields year-to-date, propelling corporate DB funded levels to their highest points since before the global financial crisis. 

Equities Bolster Lower Yields 

Equity markets experienced robust performances during the month, with global equities rising by 2.3% and the S&P 500 by 3.6%, according to LGIM. Despite a 17-basis-point decline in plan discount rates, largely due to lower Treasury yields, plan assets with a traditional “50/50” asset allocation increased by 1.7%, while liabilities rose by 0.6%. This dynamic resulted in an overall increase in funding ratios by the end of June, the firm noted. 

Agilis also observed a decline in Treasury yields across the curve in June, which led to a slight decrease in pension discount rates. Strong performance in both equity and fixed-income securities resulted in a minimal increase in pension liabilities, ranging from 0.5% to 1.5%, depending on plan characteristics.  

Contributing to this positive performance, according to Agilis, was the stability of the U.S. labor market, the stabilization of inflation and optimism in the technology and communication sectors, particularly driven by advancements in artificial intelligence. 

The WTW Pension Index also continued its upward trend in June, reaching its highest level since late 2000. Positive investment returns were partially offset by increased liabilities due to decreased discount rates, leading to a 0.5% rise over the month, bringing the index level to 117.0. 

Finally, Milliman’s latest Pension Funding Index reported a stable funded status in June, maintaining a $46 billion surplus while the funded ratio slightly increased to 103.7%. A decrease in discount rates by seven basis points led to a $9 billion rise in pension liabilities, counterbalanced by a $9 billion increase in the market value of plan assets due to a 1.22% investment return in June. 

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