US Corporate Pension Funding Rebounds from May Drubbing

The funded status of the 100 largest US corporate defined benefit pension plans increased by $1 billion in June, according to the Milliman 100 Pension Funding Index (PFI) released by consulting firm Milliman.

The aggregate deficit for the plans declined to $212 billion from $213 billion at the end of May mainly due to healthy asset gains in June. However, those gains were offset by rising pension liabilities, which was the result of a decrease in the benchmark corporate bond interest rates used to value those liabilities. As of June 30, the funded ratio edged higher to 88.0%, from 87.7% at the end of May, and the current funded ratio at mid-year trails the funded ratio of 89.4% at the beginning of the year.

The 2.82% investment gain for the plans in June raised the Milliman 100 PFI asset value to $1.556 trillion from $1.518 trillion at the end of May. Milliman said June’s asset returns more than made up for investment losses reported in May and continues the upward trajectory of asset gains seen during most of the year.

“The low discount-rate environment—the likes of which we haven’t seen since September 2016—would spell a lot more trouble for corporate pensions if it weren’t for 2019’s overall asset gains,” Zorast Wadia, co-author of the Milliman 100 PFI, said in a release. “In fact, three years ago, the PFI deficit was nearly double what it is today.”

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Wadia said investment returns for 2019 have so far exceeded expectations in every month except May, when US corporate pension plan funding plunged $65 billion, adding that “if discount rates increase in the second half of the year, this could be a truly favorable year for corporate pensions.”

Milliman also reported that the PFI projected benefit obligation (PBO) increased by nearly the same dollar amount as the asset gain in June. Plan liabilities rose by $37 billion for the month, which was due to a decrease of 16 basis points in the monthly discount rate to 3.45% from 3.61% in May. June’s discount rate was the lowest since the end of September 2016, when the rate was 3.42% and the funded status deficit was more than $400 billion.

For the quarter ending June 30, assets grew $33 billion while plan liabilities increased by $70 billion. Investment returns exceeded expectations during the second quarter, however discount rates, which fell by 33 basis points, had a bigger impact on the funded status, said Milliman. The net result was a funded status loss of $37 billion. For the quarter, the funded ratio of the Milliman 100 companies decreased to 88.0% at the end of June from 89.7% at the end of March.

The firm said that if the Milliman 100 PFI companies were to earn the expected 6.6% median asset return, and if the current discount rate of 3.45% is maintained through 2020, the plans’ funded status would increase to 89.8% by the end of 2019, and 93.4% by the end of 2020. For purposes of the forecast, Milliman assumed 2019 and 2020 aggregate annual contributions of $50 billion.

Milliman also said that under an optimistic forecast that has interest rates rising to 3.75% by the end of 2019 and 4.35% by the end of 2020, with annual asset gains of 10.6%, the funded ratio would climb to 95% by the end of 2019 and 111% by the end of 2020. However, under a pessimistic forecast with a discount rate of 3.15% at the end of 2019 and 2.55% by the end of 2020, with annual returns of just 2.6%, the funded ratio would decline to 85% by the end of 2019 and 78% by the end of 2020.

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

The solvency positions of Canada’s defined benefit pension plans declined slightly in the second quarter of 2019 despite relatively strong asset returns during the period, according to professional services firm Aon’s quarterly Median Solvency Ratio survey.

Aon said the median solvency remains high by historical standards but cautioned that falling bond yields suggest pension plan sponsors should prepare for volatility ahead.

“Despite the slight solvency ratio decline in the second quarter, the fact remains that the funded status of DB plans in Canada is still high, while many plans are at or getting close to a strategic end state,” said Aon’s William da Silva in a statement. “Given the volatility we have seen over the past few months, it’s arguably more important than ever that plan sponsors review and, where necessary, revise their end-game strategy.”

Aon’s median solvency ratio measures the financial health of a defined benefit plan by comparing total assets to total pension liabilities on a solvency basis. The analysis takes into account the index performance of various asset classes, as well as the applicable interest rates to value liabilities on a solvency basis.

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In the most recent survey, the solvency ratio increased by 0.8 of a percentage point in the second quarter of 2019 to 99.3% from 98.5% the previous quarter. The survey also found that 48.2% of the plans were fully funded as of July 1, up 1.2 percentage points since the end of the first quarter.

Canadian bond yields fell in the second quarter as they have the two previous quarters, with Canada 10-year yields down 24 basis points and Canada long bond yields down 29 basis points. Aon noted that lower yields increase pension plan liabilities and adversely impact plan solvency.

The survey also found that pension assets returned 2.7% in the quarter, compared with an 8.5% return in the first quarter. And in Canadian dollar terms, most equity indices had positive returns, led by the Canadian S&P/TSX composite, which rose 2.6%, the U.S. S&P 500 (+2.0%), global MSCI World (+1.7%) and international MSCI EAFE (+1.4%) indices. However, the MSCI Emerging Markets index declined 1.6%.

Real asset returns diverged in the second quarter as global infrastructure rose 1.4% in Canadian dollar terms, while global real estate declined by 2.3%. In fixed income, falling bond yields drove prices higher as the FTSE TMX Long Term Bond Index rose 4.8%, while the FTSE TMX Universe index increased 2.5%.

“Sentiment is changing direction on a dime,” said Erwan Pirou, chief investment officer for Aon’s Delegated Investment Solutions (Canada). “In six months, we have gone from a rising-yield environment, which lowered pension fund liability, to a falling-yield environment, which is increasing liability.”

Pirou added that “traditionally structured pension plans will struggle to keep up, and sponsors could well miss opportunities to de-risk before it’s too late. The past six months have put the need for speedy and efficient decision-making into a real-world context.”

Tags: Aon, Canada, Defined benefit (db) pension plans, Funded Status, Pension, solvency