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

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.

Tags: Agilis, Corporate pension funding, Goldman Sachs Asset Management, LGIM America’s Pension Solutions Monitor, Mercer, Mike Moran, Milliman 100 Pension Funding Index, Wilshire, WTW Pension Index

President Joe Biden Thursday nominated Deva Kyle, a counsel at law firm Cohen, Weiss and Simon LLP, as director of the Pension Benefit Guaranty Corporation.

Deva Kyle

Kyle would serve a five-year term as director if the Senate approves the appointment. Ann Orr has been serving as acting director since the April 30 end to Gordon Hartogensis’ term. The PBGC is a federally chartered insurer that backstops private pension funds in the U.S.

Kyle joined Cohen, Weiss and Simon in 2022 as a counsel and advises clients on a wide range of employee benefits, federal tax and legislative matters. Cohen, Weiss and Simon is the same firm for which Assistant Secretary of Labor Lisa Gomez worked before leaving to run the Employee Benefit Security Administration.

Kyle began her career in 2004 with the PBGC, where she eventually served as staff director in the Office of Policy and External Affairs, leading the agency’s multiemployer pension policy efforts. In 2015 and 2016, Kyle worked at the Department of the Treasury, where, with a team of Treasury leaders, she crafted the Multiemployer Pension Reform Act program regulations and processes.

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She returned to the PBGC in 2017 to serve as acting deputy chief of negotiations and restructuring, leading PBGC’s single and multiemployer programs.

She also served as tax counsel on detail to the U.S. House of Representatives Committee on Ways and Means, developing legislation for the introduction of the MPRA program.

Kyle earned a B.A. in sociology from Vassar College and a J.D. from the Georgetown University Law Center.

Kendra Isaacson, a principal at public policy consultancy Mindset and a former counsel for the Senate Committee on Health, Education, Labor and Pensions, is a former colleague of Kyle’s and says she is extremely qualified for the director role and “understands the technical ins and outs of the single and multiemployer programs” at the PBGC.

John Lowell, a partner in October Three Consulting, said in an email response that unlike a number of previous appointees to this role, Kyle comes to the position with PBGC and Treasury experience.

“In particular, she has extensive experience working with multiemployer plans—obviously a high priority in recent years and currently for [the] PBGC,” Lowell said. “While a nominee’s background is rarely a complete tip-off as to how they will handle their role, this suggests that the administration and its advisers would like to see the continuation of and perhaps increase in private sector pensions for rank-and-file workers.”

The National Coordinating Committee for Multiemployer Plans Executive Director Michael Scott also expressed his support for Kyle’s nomination.

“[Kyle’s] extensive experience at the PBGC, as well as in the private sector representing defined-benefit plans, will allow her to provide the PBGC with the leadership the nation needs to protect the retirement security of millions of Americans whose pensions are insured by the PBGC’s single-employer and multiemployer guaranty programs,” Scott stated. “Deva’s demonstrated expertise in defined benefit plans, her political skills and her ability to work in a bipartisan manner will serve the PBGC and its stakeholders well. NCCMP urges bipartisan support for her nomination as well as a swift confirmation by the Senate.”

Senator Bill Cassidy, R-Louisiana, urged President Joe Biden in a July 9 letter to choose a nominee who “both acknowledges [the] PBGC’s historic shortcomings and has concrete plans to solve them in a manner unafflicted by partisan politics.”

Cassidy argued in his letter that the PBGC is plagued by operational problems that have “cost taxpayers money, put pension plans at near-catastrophic levels of underfunding and caused delays that prevented pension funds from being able to quickly right their financial status.”

The senator also voiced concerns over the rollout of the Special Financial Assistance program implemented through the American Rescue Plan Act of 2021. He further argued that the PBGC has created challenges for single-employer plans by “failing to timely provide necessary information that would help them correct their financial problems.”

In response to Cassidy’s letter, Isaacson says she believes Kyle fits the bill of having a bipartisan track record and substantive experience on the subjects that Cassidy laid out.

“[Kyle] is an attorney that has been working with compliance and counseling clients on these matters, … so I feel like she is a nominee that [Cassidy’s] office could work with,” Isaacson says.

As both the Senate Health and Finance Committees have jurisdiction over the PBGC, both committees will need to vote on Kyle’s nomination before it goes to a vote of the full Senate.

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Tags: Ann Orr, Deva Kyle, John Lowell, Kendra Isaacson, leadership, Michael Scott, National Coordinating Committee for Multiemployer Plans, Pension Benefit Guaranty Corporation, Senator Bill Cassidy