Corporate Pension Funded Status Ticks Up in October

The funded ratios of corporate pension plans in the U.S. mostly rose in October, according to numerous trackers, continuing a near-perfect streak of month-over-month funded status improvement for more than a year. Over the past 12 months, according to Wilshire, only three have seen declines in funded status.

Despite a month of weaker investment returns, most trackers found that declines in asset values were offset by increases in the discount rates used to value pension liabilities. According to Mercer, which tracks the funded status of pension plans of companies in the S&P Composite 1500 Index, the funding ratios of these plans increased to 108% by the end of October, up from 107% at the end of September.

The WTW Pension Index hit all-time highs, reaching 118.3 at the end of October, 2.6 percentage points higher than at the end of September. Aon, which tracks the funded status of pension plans of companies in the S&P 500, saw funded status increase by 0.3 percentage points in, to 101.2% from 100.9%.

“October’s increase in funded status resulted from the significant monthly rise in Treasury yields, marking the first month-over-month increase in the discount rate since April 2024,” said Ned McGuire, managing director at Wilshire, in a statement. “Corporate bond yields, which are used to value corporate pension liabilities, are estimated to have increased by approximately 40 basis points in October.”

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Corporate pension funded status tracked by Wilshire increased by 1.3 percentage points over September, up to 102.9%. The value of plan liabilities declined by 4.6%, which offset a 3.5% decline in the value of pension assets.

Assets, Investment Returns Down

Across the board, investment returns trended down in October, lowering the value of pension assets. However, these declines were mostly offset by increases in pension discount rates.

According to LGIM Americas’ Pension Solutions Monitor, assets of corporate pension plans with a 50/50 allocation to stocks and bonds decreased 3.4% in October, which was entirely offset by an increase in discount rates.

Milliman, which tracks the funded status of the 100 largest corporate defined benefit plans through the Milliman 100 Pension Funding Index, saw assets of these pension funds decline by $41 billion, to $1.322 trillion at the end of October. The PFI plans’ combined projected benefit obligation fell by $51 billion during the month due to discount rates, which jumped to 5.31% in October from 4.96% in September.

According to October Three Consulting, a hypothetical 60/40 portfolio lost more than 2% in October, as did a hypothetical 20/80 portfolio.

Aon reported that pension assets declined by 3.3%, or $20 billion, which was offset by $73 billion in liability decreases, improving funding surpluses by $53 billion.

“October’s increase came thanks to a 35-basis-point rise in discount rates—the first rise in rates in six months,” said Zorast Wadia, author of the PFI, in a statement. “The resulting decline in plan liabilities offset October’s investment returns of [negative]2.53%, which was the second-worst monthly performance of the year. The oscillating funded ratio serves as a reminder that managing funded status volatility should remain a top priority for plan sponsors as we head toward year-end.”

Rising Discount Rates

According to Milliman, the funded status of plans in the PFI rose to 103.4% at the end of October. The prior month, the funded ratio stood at 102.5%.

Despite investment losses, discount rates increased for the first time since April, as tracked by Milliman. Rates increased to 5.31% in October from 4.96% in September. This was a result of the 10-year Treasury rising 47 basis points, while interest rates to value pension liabilities increased 40 basis points.

The decrease in the value of pension liabilities more than offset the decline in the value of pension assets, which dropped 3.3% in October, according to Milliman.

Despite weaker investment returns, according to LGIM’s Pension Solutions Monitor, funded status was flat during the month, and liabilities declined by 3.4%, offsetting the 3.4% decline in the value of plan assets.

Scott Jarboe, a partner in Mercer’s wealth practice, said in a statement: “Despite the large rate cut by the Fed in September, interest rates bounced back as the market continues to speculate what future rate cuts will look like.”

Discount rates, measured by the Mercer yield curve, increased to 5.33% from 4.93% month-over-month.

According to Agilis, October ended a five-month streak of declining discount rates. Depending on portfolio construction and other factors, pensions saw their funded statuses increase between 0.5% and 2.0% in October.

Mercer’s Jarboe said heightened funding surpluses have led to an increase in pension de-risking activity, which could continue further.

“Plan sponsors should continue to keep an eye on interest rates and potential future cuts,” Jarboe said in his statement. “Sponsors in surplus positions have a lot of potential de-risking paths on the table in the current market environment.”

Corporate Pension Funded Status Slightly Declines in September

Corporate Pension Funded Status Mixed in August

Tags: Agilis, LGIM America’s Pension Solutions Monitor, Mercer, Michael Clark, Milliman, Milliman 100 Pension Funding Index, Scott Jarboe, WTW, WTW Pension Index, Zorast Wadia

The Wharton professor’s research and efforts have changed public policy on pensions and brought attention to the importance of financial literacy.

Olivia Mitchell

As part of the 2024 Industry Innovation Awards, CIO will celebrate Olivia Mitchell, professor of business economics and public policy, as well as insurance and risk management, at the Wharton School of the University of Pennsylvania, with a Lifetime Achievement Award in recognition of her contributions to the industry.

Mitchell, whose titles also include International Foundation of Employee Benefit Plans professor, has spent more than 31 years at Penn and also serves as executive director of the Pension Research Council and as director of the Boettner Center on Pensions and Retirement Research there. In 2023, she was elected a distinguished fellow of the American Economic Association.

The award will be presented on December 10 at CIO’s Industry Innovation Awards Dinner in New York City.

The child of economists who attended high school in Lima, Peru, and Santiago, Chile, her college studies focused on development economics. However, in an early job, teaching at Cornell University, she was asked to teach a course on pensions and health insurers. Some time later, she was hired at Wharton to continue her focus on pensions and retirement security. She has stayed on that path.

She has also developed a focus on financial literacy, the subject of many of her recent articles, and she launched an undergraduate course at Penn called “Consumer Financial Decision Making” to help students learn to navigate the financial issues of adulthood.

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Her research and experience make her a resource for policymakers seeking insights, ideas or recommendations.

Her contribution to the national dialogue about retirement included her role as a member of President George W. Bush’s Commission to Strengthen Social Security more than 20 years ago. That bipartisan group advocated ways to reduce the growth rate of benefits, without cutting benefits. It also recommended allowing Social Security participants to set aside some part of the Social Security tax contribution into a personal account, an idea that seemingly would have some support today, and one she says would have been “a wash” for the system’s solvency.

In her own words, “due to political opposition and also the fact that that year had 9/11, the plan was dead in the water.”

More than 20 years later, Social Security is estimated to have to start reducing benefits payments in 2034, and Mitchell predicts a political compromise on reforming the system will not come until the country is “within a couple of months of cutting benefits.”

Regarding pensions and longevity globally, Mitchell says the “workplace, workforce and employers are different today,” and new models are developing globally.

However, she acknowledges that in an aging world, people likely are going to have to “work longer, save more and expect less.”

CIO has presented the Lifetime Achievement Award since 2011 to individuals, including asset allocators, asset managers and now an academic, whose work in the pension and institutional investing business has protected and benefitted the investment resources of pension funds, endowments and foundations around the world.

Past honorees received the recognition for different efforts and varied careers, but the one thing they share are the contributions each has made to the community of investors and to institutional asset ownership. As we will tonight, this award has always recognized people who helped train the up-and-coming talent in the industry, who have given time and attention to solving complex problems independently, providing service to the industry, and advancing important ideas.

Previous winners have included (among others) Christopher Ailman, then CIO of the California State Teachers’ Retirement System; Walter Kress, CIO of EY; Robin Diamonte, then CIO of UTC, Thomas “Britt” Harris, then the CIO of the Teacher Retirement System of Texas; Mark Schmid, then the CIO of the University of Chicago; Ash Williams, the then-CIO and executive director of the Florida State Board of Administration; and Mansco Perry, the then CIO of the Minnesota State Board of Investment.

We have honored people for their innovations—in investing and in operations—their determination and their contributions to the community of the world’s investors and those concerned about retirement policy.

When reviewing the names that came up in our conversations this year, Mitchell was the choice.

After more than 45 years of research and teaching about pensions, investor behavior and financial literacy, and amid her ongoing work as an educator and policy adviser, she makes time to highlight the work of others in the field and to work with global groups to promote healthy aging and continue studying the work of pension and benefits world.

Tags: Industry Innovation Awards, Lifetime Achievement Award, Olivia Mitchell, Wharton Pension Research Council, Wharton School