US Corporate Pensions Continue Funding Surplus in March

The funded status of the largest U.S. corporate defined benefit plans continues to push into surplus status. According to a number of pension trackers, funded status is reaching all-time highs.

Strong equity returns in March and throughout the first quarter of the year contributed to pension surpluses. Strategists are recommending corporate pension sponsors consider making liability-matching allocations to maintain funding levels when anticipated rate cuts materialize later this year.

WTW

WTW’s pension index, which tracks the funded status of a hypothetical 60/40 portfolio increased to 114.3 at the end of March, a 1.1-point increase from February. Funding surplus in the index reached its highest level in two decades, per WTW. That is up from a near-term low in 2020, when funded status was just over 65 points.

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WTW’s benchmark portfolio returned 2.4% in March, with equities returning 3.4% and fixed income returning 0.9%.

Milliman

Funded status of the largest corporate defined benefit plans rose to 105.6% in March, up from 105.3% the previous month. Milliman, which tracks the funded status of the largest 100 U.S. corporate DB plans through the Milliman 100 pension funding index says this 0.3% increase in funded status represents a $5 billion increase in the spread between plan assets and liabilities.

In total, these pensions were $73 billion in surplus at the end of March, up from a $68 billion surplus at the end of February. In total, there were $1.373 trillion in plan assets as of March 31, and $1.299 trillion in plan liabilities. These figures increased $19 billion and $14 billion respectively, month over month.

“Pension funded status improved for all three months of the first quarter, and strong market returns helped to offset the effect of March’s discount rate declines,” said Zorast Wadia, principal and consulting actuary at Milliman and author of the monthly PFI. “However, if the Fed cuts rates as expected and corporate bond discount rates continue to fall, the funded status gains may dissipate unless plan sponsors adhere to liability-matching investment strategies.”

Agilis

Strong equity returns have boosted the funded status of corporate pension, Agilis writes in its monthly U.S. Pension Briefing. Equities returned 10% for the year, with U.S. equities returning 3.2% in March.

“March was another good month for pension plan funded status with market gains generally outpacing liability growth due to small declines in discount rates. Both the Fed and the markets are posturing for second-half 2024 interest rate cuts, meaning that now is the time for pension plan sponsors to give serious consideration to increase allocations to liability-matching assets to protect funded status gains realized over the last year,” wrote Agilis chief commercial officer Michael Clark in a statement.

MetLife Investment Management

MetLife Investment Management, which tracks the funded status of U.S. corporate pension plans quarterly, found the funded status of 500 companies within the Russell 3000 index rose to 104.8% at the end of the first quarter of 2024.

“Pension assets rose during the first quarter as a result of positive equity and alternatives performance,” wrote Stephen Mullin, head of High-Grade Strategies at MIM, in a report.

Funded status, according to MIM, peaked for the quarter at 105.2% on March 21, and hit a low of 100.4% on January 19. Pension discount rates fluctuated between 4.93% at the beginning of the quarter to 5.18% at the end of the quarter, reaching a high of 5.38% on February 13.

Wilshire

Wilshire estimates that corporate plan funding increased by 1 percentage point in March, rising to 110.1%. The firm, which tracks the funded status of DB plans from within the S&P 500, says that funded status has increased by 5.1 points year to date. According to Wilshire’s tracker, funded status increased a total of 6.3 points during 2023.

The 1-point increase in funded status was due to a 1.7% increase in the liability of plan assets, offset by a 0.8% in the value of plan liabilities.

“With the second consecutive month, and quarter, of positive asset returns, U.S. corporate pension plans have continued their 15-month streak of overfunding with the estimated funded ratio at its highest month-end level in several decades,” wrote Ned Mcguire, managing director at Wilshire, in the monthly report.

LGIM America

DB plans saw their funded status increase to 108.2% in March from 107.3% in February, according to LGIM America’s Pension Solutions Monitor.

Strong equity returns boosted plan assets, with global equities returning 3.1% and the S&P 500 returning 3.2% during the month. According to LGIM’s benchmark, which tracks a 50/50 portfolio, plan assets increased 2.4%, while liabilities increased 1.5%, resulting in a 0.9% increase in funded status in March.

Insight Investment

According to Insight Investment, which tracks the funded status of U.S. corporate pension plans in its monthly funded status update, funded status for these plans increased 0.5% to 112.2% in the month of March. Insight Investment attributed this growth to strong returns from growth assets. Assets returned 2.3%, while liabilities returned 1.8%, resulting in a 0.5% increase in funded status.

According to Ciaran Carr, head of the client solutions group at Insight Investment, many plan sponsors are reviewing their options and what to do with their funding surplus.

“The client conversation around end-state solutions has started to shift to incorporate a wider menu of options available to the sponsor and participants. There is a greater focus today on discussing alternative options to a pension risk transfer in the US DB market now that many plans are in surplus and can think of pension surplus as an asset that can help benefit the participant,” Carr wrote in the report.

October Three

Funded status of corporate plans increased for both a traditional 60/40 portfolio and fixed income heavy portfolios, according to October Three’s monthly Pension Finance Update, which tracks the performance of hypothetical corporate pension plans.

October Three tracks two hypothetical plans, Plan A, a plan with a 60/40 asset allocations saw its funded status increase just under 1%, as did Plan B, a largely retired plan with a 20/80 allocation. Equities increased 3% in March, with bonds increasing 1%.

October Three’s Plan A portfolio saw a 2% increase in March, up 4% for the year. Plan B saw a 1% increase during March, although it is only up less than 1% for the year, due to a 1-3% decline in bonds.

Mercer

The funded status of corporate pension plans decreased by 2% in the month of March, declining to 107%, according to Mercer, which tracks the funded status of corporate DB plans of companies in the S&P 1500.

This decline in funded status was attributed to a decrease in discount rates, which was offset by strong equity returns. According to Mercer, the funding surplus of companies in the S&P 1500 decreased to $114 billion at the end of March from $137 billion at the end of February.

“Pension funded status for the S&P 1500 fell 2 percent in March as a good month for equities was offset by interest rate decreases,” wrote Matt McDaniel, partner and U.S. pension strategy and solutions leader at Mercer, in a release. “Equity markets continued to climb last month with the S&P 500 reaching a new all-time high to close out the month of March. However, interest rates decreased, leaving funded status lower to end the first quarter.”