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.”

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

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.”