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Asset Allocation

Corporate DB Pension Plan Funded Ratios Surge in 2021

Funded levels for 255 S&P 500 plans reach their highest level since the Great Financial Crisis, Wilshire reports.

By Michael Katz



The aggregate funded ratio for 255 defined benefit pension plans sponsored by S&P 500 Index companies surged in 2021 to 96.2% from 87.8%, its highest level since just before the Great Financial Crisis, according to research from Wilshire.

That figure has since risen to 97.4% as of the end of May, which Wilshire’s 2022 Report on Corporate Pensions attributed to a drop in liability values during the first half of 2022. Wilshire said there has been a decrease in liability values since the beginning of the year due to a nearly 150 basis point increase in yields used to discount pension liability values. It is the first time the discount rate has increased in three years. However, the report also noted that at the same time assets have decreased due to factors such as higher inflation, interest rate hikes and the Russia-Ukraine war.

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Wilshire estimates that aggregate assets increased to a record high of $1.633 trillion at the end of 2021, a 2.26% increase from $1.597 trillion a year earlier. Meanwhile, aggregate liabilities for the plans decreased 6.6%, or $121 billion, to $1.70 trillion as of the end of fiscal year 2021 from $1.82 trillion a year earlier. As a result of the decrease in liabilities and increase in assets, the aggregate pension deficit shrank by an estimated $157 billion to $65 billion from $222 billion. It was the largest improvement of the plans’ deficit since the “taper tantrum” of 2013.

Investment returns and contributions increased the plans’ asset values by 8.48% and 1.32% respectively during the year, while benefit payments decreased asset values by an estimated 6.13%. The contributions and asset returns increased funded levels by eight percentage points, which more than offset benefit accruals, interest cost and benefit payments, which decreased the funded ratio by approximately four percentage points.

As a result of the improved funded levels, the number of plans that reported pension assets that equal or exceed liabilities nearly doubled during the year to 88 from 46, which represents 34.8% of the plans, compared with 17.8% at the end of fiscal year 2020.

The report also found that although the aggregate asset allocation of the plans changed little over the past year, the total allocation to equity has dropped by more than 10 percentage points over the last decade, while the total allocation to fixed income has increased by more than 13 percentage points.

Related Stories:

Conflicting Data on Corporate Pension Funded Status for May

Once a Liability, Corporate Pension Plans Start Turning a Surplus for Many Companies

How Corporate Pension Funds Overcame Their Deficits Last Year

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Home > News > Risk > Maybe a Recession Isn’t Headed Our Way, Says Pantheon
Risk

Maybe a Recession Isn’t Headed Our Way, Says Pantheon

As the market blips up for a change, the firm’s top economist sees dwindling profit margins as saving the day.

By Larry Light



Amid all the economic gloom and doom, and a brutal market drop, stock investors are permitting themselves some breathing room, with a 0.95% increase in the S&P 500 Thursday. This follows a small fall Wednesday (0.13%) and a nice pop (2.45%) on Tuesday. True, this could be a short-lived bear market rally.

 

Yet the uptick prompts the question: Could there indeed be some actual hope that no recession will blight our existence in the coming 12 months?

 

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To Ian Shepherdson, chief economist at Pantheon Macroeconomics, a virtuous chain of events is possible, where the Federal Reserve whips inflation now and averts a recession. In a research note, Shepherdson argued that compressed profit margins could be an integral part of that positive progression.

 

Rapidly expanding margins were a feature of the buoyant pandemic economic growth that we enjoyed until recently. Pantheon estimates that two percentage points of the core Personal Consumption Expenditures index, the Fed’s favorite inflation gauge, stems from strong margins. The core PCE (that is, with energy and food stripped out) was 4.9% recently.

 

Lately, Shepherdson noted, the core Producer Price Index is still rising, but its trade services component (which measures immediate demand) has descended. Trade services have “abruptly stopped rising, because the force which propelled it upwards—the pandemic inventory crunch—is now over, and retail and wholesale inventory in most sectors is now approaching its pre-Covid level.”

 

His expected result: downward pressure on prices as profits slump. Already, various forecasters are lowering expected corporate earnings for the rest of this year. But bounteous cash on household and company balance sheets should cushion the economic impact of lower profits, the economist reasoned.

 

The most commonly followed inflation metric, the Consumer Price Index, has done nothing but climb, which has fed people’s growing unease about the economy. It rose to an annual 8.6% in May, up from 8.3% the month before.

 

The PCE, though, has actually edged down slightly, to 6.3% in April from 6.6% in March. Core PCE had a similar small dip, to 4.9% in April from 5.2%. Shepherdson projected that the May core PCE, due out June 30, will continue to show a down-trend, to 4.7%. Recent drops in oil prices lend that notion support.

 

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