S&P 1500 Pension Funded Status Rises 2% in July

Rising equity markets helped boost the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies 2% during July to reach 91% at the end of the month, according to consulting firm Mercer.

As of July 31, the estimated aggregate deficit of the plans decreased to $193 billion from $229 billion at the end of June. During that time, the S&P 500 index increased 3.6%, while the MSCI EAFE index gained 2.4%, and typical discount rates for pension plans, as measured by the Mercer Yield Curve, moved up 1 basis point to 4.15%.

“Interest rates held steady in July, letting equity markets do the work in running up gains,” which drove the funded status to a five-year high in July, said Matt McDaniel, a partner in Mercer’s wealth business, in a release. “Plan sponsors are now faced with a tough choice: do they continue to ride an equity bull market that is approaching 10 years long, or do they move to lock in gains through derisking?”

The aggregate value of pension plan assets of the S&P 1500 companies as of June 30 was $1.93 trillion, compared with estimated aggregate liabilities of $2.16 trillion. Allowing for changes in financial markets through July 31, changes to the S&P 1500 constituents, and newly released financial disclosures, the estimated aggregate assets at the end of July were $1.96 trillion, compared with the estimated aggregate liabilities of $2.15 trillion.

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Mercer also reported that Treasury yields increased for all maturities while corporate bonds remained steady during July, which decreased the implied credit spread by 10 basis points. Mercer Yield Curve spot rates increased modestly across early maturities, which was partially offset by a small decrease for a majority of the longer maturities.

The Mercer Yield Curve is a spot yield curve intended to be used as an aid in selecting discount rates under various accounting standards for pension, retiree medical, or other post-retirement benefit plans.

Tags: Aquity, Corporate Pension, Funded Status, S&P 1500

The funded ratio of the 100 largest US corporate defined benefit pension plans rose to 93.4% in July from 92.7% at the end of June, and 85.8% at the same time last year due to a strong investment performance during the month, according to consulting firm Milliman.

The aggregate deficit for the plans fell to $108 billion from $120 billion, while the market value of their assets increased $13 billion to $1.537 trillion from $1.524 trillion at the end of June due to a 1.15% investment gain for the month. The funded status improvement was partially offset by pension liability increases, which was a result of a small decrease in the benchmark corporate bond interest rates used to value pension liabilities.

The 93.4% funded ratio is the highest the Milliman 100 Pension Funding Index has reached since the fourth quarter of 2008, when discount rates were significantly higher than they are today, according to Milliman.

For the 12 months to the end of July, the cumulative asset return for the pensions has been 5.4%, while the Milliman 100 PFI funded status deficit has improved by $138 billion during that time. The improvement in the funded status deficit has been attributed to discount rates having risen to 4.11% at the end of July from 3.71% at the same time last year.

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Milliman said that if the plans were to achieve the expected 6.8% median asset return as forecast in its 2018 pension funding study, and if the current discount rate of 4.11% were maintained during 2018 and 2019, the funded status of the surveyed plans would increase to 94.8% by the end of 2018, and 98.7% by the end of 2019. The firm said this would result in a projected pension deficit of $85 billion by the end of 2018, and $21 billion by the end of 2019. For its forecast, Milliman assumed 2018 aggregate contributions of $48 billion, and 2019 aggregate contributions of $52 billion.

Milliman said that under an optimistic forecast with interest rates rising to 4.36% by the end of 2018 and 4.96% by the end of 2019, and annual asset gains of 10.8%, the funded ratio would climb to 99% by the end of 2018, and 115% by the end of 2019. However, under a pessimistic forecast with similar interest rate and asset movements (3.86% discount rate at the end of 2018 and 3.26% by the end of 2019, and 2.8% annual returns), the funded ratio would decline to 91% by the end of 2018, and 84% by the end of 2019.

Tags: Corporate Pension, Defined benefit (db) pension plans, Milliman, Pension