28 October 2020

Corporate Pension Funding Shows Mixed Results in September

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The average funding ratios for corporate pension plans decreased slightly in September according to reports from Legal & General Investment Management America, Wilshire Associates and Northern Trust Asset Management, while a report from Mercer estimated that ratios held steady over the month.

LGIMA found the funding ratio of a typical corporate pension plan decreased by 1.2 percentage points to 77.9% at the end of September from 79.1% at the end of August, primarily driven by poor equities performance. LGIMA estimated U.S. Treasury rates declined by 2 basis points while credit spreads widened by 6 basis points, resulting in the average discount rate increasing by 4 basis points.

Liabilities for the typical plan decreased by roughly 0.4%, while plan assets with a traditional 60% equity/40% bond asset allocation decreased by roughly 1.9%, LGIMA said.

As measured by Wilshire, the aggregate funding ratio for U.S. corporate plans decreased by 1.1 percentage points to 83.1% as of Sept. 30 from Aug. 31. The monthly change in funding resulted from a 1.7-percentage-point decrease in asset values partially offset by a 0.4-percentage-point decrease in liability values.

"September's decrease in funded ratio was primarily driven by negative returns for most asset classes, especially U.S. equity, which snapped five consecutive monthly increases," said Ned McGuire, managing director and a member of the investment management and research group of Wilshire Associates, in a news release announcing the results. "September marks the sixth funded ratio decline within the trailing 12 months and the fifth this year."

According to Northern Trust, the average funding ratio for S&P 500 companies with defined benefit plans fell to 82.5% in September from 83.5% the month before. Global equity market returns were down about 3.2% during the month, while the discount rate increased to 2.27% as of Sept. 30 from 2.23% as of Aug. 31, leading to lower liabilities.

"Funded ratios are still 4% lower since the beginning of the year," said Jessica K. Hart, senior vice president and head of the outsourced CIO retirement practice at Northern Trust Asset Management, in a news release. "Liability increase has exceeded asset growth as discount rates declined by 57 basis points year-to-date. As we expect rates to stay low and equity returns to be modest going forward, further improvement in funded ratio may take some time."

Meanwhile, Mercer said the estimated aggregate funding level of pension plans sponsored by S&P 1500 companies remained level at 83% in the month ended Sept. 30 because of a decrease in equity markets offset by an increase in discount rates to 2.53% from 2.43%.

The estimated aggregate deficit of pension fund assets of S&P 1500 companies totaled $433 billion as of Sept. 30, unchanged from the end of August.

"Funded status was flat month over month as equity market declines were offset by a rise in interest rates," said Scott Jarboe, a partner in Mercer's wealth business, in a separate news release. "We saw the S&P 500 pull back after reaching an all-time high in August, and interest rates rose slightly during the month with the Fed indicating they would keep short-term rates low for the foreseeable future. Plan sponsors should review 2021 budgets and understand the sensitivity of pension liability and expense in light of the persisting low-rate environment and potential for a pullback in equity markets as we approach the election and end of the year."

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