Mercer Finds Pension Funding Level Drops 1% in June as Deficit Hits $416 Billion

The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies decreased by 1% to 82% funded status in June, due to a decrease in discount rates partially offset by mixed equity markets, according to a new report by Mercer.

Mercer noted that as of June 30, 2017, the estimated aggregate pension deficit of $416 billion represented an increase of $25 billion compared to the deficit measured at the end of May 2017. The aggregate deficit is up $8 billion from the $408 billion measured at the end of 2016, according to Mercer.

The deficit increased at the same time as the S&P 500 index gained 0.5% and the MSCI EAFE index lost 0.4% in June. Typical discount rates for pension plans as measured by the Mercer Yield Curve decreased by 4 basis points to 3.78%.

Matt McDaniel, a partner in Mercer’s US Wealth business, said the funding level fell even as “another Fed rate hike resulted again in a downward tick in pension discount rates. It is yet another reminder that the long duration rates used for pension liabilities are much more sensitive to supply and demand factors than to short-term Fed policy decisions.

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“This means that the future rate increases planned by the Fed probably won’t directly translate to improved pension funded status. Sponsors need a strategy to deal with a potentially flattening yield curve–those holding fixed income investments in a traditional aggregate strategy may find themselves hit the hardest as rates increase,” McDaniel said.

Mercer estimated the aggregate funded status position of plans sponsored by S&P 1500 companies on a monthly basis that the estimated aggregate surplus/deficit position and the funded status of all plans sponsored by companies in the S&P 1500.

The estimates are based on each company’s latest available year-end statement and by projections to June 30, 2017, in line with financial indices. The Mercer estimates include US domestic qualified and non-qualified plans and all non-domestic plans.

Using estimates of the aggregate funded status position of plans in the S&P 1500, Mercer estimated that the aggregate value of pension plan assets as of May 31, 2017, was $1.90 trillion, compared with estimated aggregate liabilities of $2.29 trillion.

Allowing for changes in financial markets through June 30, 2017, changes to the S&P 1500 constituents, and newly released financial disclosures at the end of June 2017, estimated aggregate assets were $1.90 trillion, compared with the estimated aggregate liabilities of $2.32 trillion.

Tags: Mercer, Pension, S&P 1500

The Virginia Retirement System (VRS) reported in its recently released annual oversight report that its trust fund held $72.4 billion in assets as of March 31, an increase of $5.3 billion from a year ago, and that its investment return was 10.7% for the year ending March 31.

The one-year return outperformed the VRS’ benchmarks, however, the fund’s three-year return of 6.3%, and 10-year return of 5.1%, were below the 7.0% assumed rate of return.

“The General Assembly took significant steps this year to strengthen VRS, fully funding the annual required contribution and fully repaying previously deferred payments to VRS,” said William Howe, speaker of the Virginia House of Delegates, in a statement.

Some of those steps include legislation that allows VRS to hire outside counsel related to investments, new stress testing and reporting policies, and expansion of the role of the Virginia Research Investment Committee to authorize money from the Research Investment Fund to reimburse VRS for its investment services.

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“While this is good news,” said Howe, “there is significantly more work to be done.”

According to Howe, the VRS is only 71% funded, with unfunded liabilities exceeding $23 billion.

“The hybrid system reforms enacted several years ago were necessary changes, but the hybrid plan faces challenges of its own,” said Howe. “Voluntary contribution rates are low, resulting in lower income replacement rates for employees. These are important issues that the Commission will have the opportunity to address.”

Public equity, which remains the largest asset class for VRS, with $30 billion in assets, was the fund’s top-performing class, returning 14% over the past year. It has three- five- and 10-year returns of 6.5%, 9.7%, and 4.9%, respectively. Investment-grade fixed income, the system’s second-largest asset class at $13 billion, reported an annual return of 1.6%, and three-, five-, and 10-year returns of 2.3%, 2.8%, and 5.0%, respectively.

Total credit strategies, which has $12 billion in asset, returned 11.7% over the past year, and has three-, five-, and 10-year returns of 4.5%, 6.4%, and 5.9%, respectively. Real assets, which make up $9 billion of the portfolio, returned 10.9% over the past year, and has three-, five-, and 10-year returns of 11.7%, 11.9%, and 6.1%, respectively. Strategic opportunities, which accounts for $2 billion in assets, reported an annual return of 9.1%, and a three-year return of 3.1% (five- and 10-year returns were not available).

VRS administers retirement plans for employees of state and local governments, including the Teachers Plan and the State Employees Plan, which are VRS’ two largest plans. Other pension plans include the individual retirement plans for 589 local political subdivisions and plans for state police officers (SPORS), other Virginia state law officers, and judges. Ranked by value of assets, VRS is the nation’s 22^ndlargest public or private pension fund, and serves approximately 675,000 members, retirees, and beneficiaries.

Tags: Public Equity, Virginia Retirement System, VRS