The estimated aggregate funding level of pension plans sponsored
by S&P 1500 companies decreased by 2% in October to 90%, primarily as a
result of a decrease in equity markets, according to Mercer.
As of October 31, 2018, the estimated aggregate deficit of $208
billion increased by $37 billion as compared to $171 billion measured at the
end of September.
The S&P 500 index decreased 6.8% and the MSCI EAFE index
decreased 8% in October. Typical discount rates for pension plans as measured
by the Mercer Yield Curve increased by 23 basis points to 4.43%.
“Pension funded status dropped sharply during October despite
increases in interest rates,” said Scott Jarboe, a partner in Mercer’s Wealth
business. “October was a reminder of how quickly funded status can drop as we
saw declines in equity markets and an increase in volatility during the month.
Following five-year funded status highs in September, we suggest plan sponsors
review their risk management policies to understand the impact of continued
volatility and consider actions to protect funded status gains that have been
realized.”
According to Wilshire Consulting, the aggregate funded ratio for
U.S. corporate pension plans decreased by 1.9 percentage points to end the
month of October at 89.6%. The monthly change in funding resulted from a 5.7%
decrease in asset values partially offset by a 3.7% decrease in liability
values. The aggregate funded ratio is up 5 percentage points both
year-to-date and over the trailing twelve months.
“October saw a sharp decline in funded ratios caused by the
worst percentage loss for the Wilshire 5000 since September 2011 which the
increase in bond yields used to value corporate pension liabilities could not
fully offset,” said Ned McGuire, managing director and a member of the Pension
Risk Solutions Group of Wilshire Consulting. “October’s 1.9 percentage
point decrease in funding was the largest pull back since a 2.1% decline in
June 2016 and brings the aggregate funded ratio back under 90%. Despite the
drop, the funding level is still 5.0 percentage points higher year-to-date,” he
added.
Northern Trust Asset Management (NTAM) said that during the
month of October, the average funded ratio for S&P 500 corporations with
defined benefit (DB) plans declined from 90.7% to 88.6%. The market downturn
more than offset the decline in liabilities from higher discount rates.
According to NTAM, the average discount rate increased from
3.92% to 4.16% during the month, and global equity markets were down
approximately 7.5% during the month.
Legal & General Investment Management America (LGIMA) said
pension funding ratios decreased to 89.6% through the month of October due to
the negative returns in both U.S and global equity markets.
It says, however, that the Treasury component increased by 18
basis points and the credit component increased by 5 basis points, resulting in
the discount rate used to measure pension liabilities increasing 23 basis
points. Overall, liabilities for the average plan decreased approximately 2.7%,
while plan assets with a traditional 60/40 allocation declined by 4.8%.
According to October Three, in October, stock markets gave back
most of what they had earned this year. Interest rates softened the blow a bit,
but both model plans it tracks suffered their worst month of the year, with
traditional Plan A dropping almost 4% and the more conservative Plan B losing
almost 2%. For the year, however, Plan A remains 5% up and Plan B is ahead a
fraction of 1%.
Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40
asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%)
with a 20/80 allocation with a greater emphasis on corporate and long-duration
bonds.
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