US corporate pension funds fluctuate due to stock falls

Changes in the average funded status of the largest U.S. corporate pension plans were mixed in April as lower stock returns weighed on the positive impact of higher interest rates, according to monthly pension trackers from some of the country’s largest pension advisory firms. The mixed results come from March’s record highs.

Meanwhile, pension fund investors are keeping an eye on interest rates, with the Federal Reserve still expected to cut rates later this year depending on how inflation, employment and other economic indicators perform in the coming months. To prepare for this eventuality, some retirement advisors continue to recommend making asset-based allocations to take advantage of today’s higher rates.

In its monthly pension funding update, October Three Consulting noted slight declines for its two pension plan trackers. Plantracker A, which tracks pensions with traditional 60% equities and 40% fixed income assets, improved modestly at less than 1%; its B-tracker, which follows a ‘retirement’ trajectory of 20% equities and 80% fixed income, fell only a fraction of 1%.

Although the funding status was slightly lower, October Three sounded a positive note on the expectation that persistently higher interest rates “will continue to boost pension finances this year.”

Pension watchers at Wilshire echoed that optimism for both April and the longer term, with the overall funding ratio for U.S. corporate pension plans estimated to rise 1.1 percentage points in April to end the month at 110.8%. The month’s rebound was partly based on a 5.2% decline in the value of liabilities due to rising government bond yields, which was larger than the 4.2% decline in asset values ​​due to the market declines under the business plans Wilshire is following.

“April’s increase in funded status was driven by the increase in Treasury yields, which led to the largest monthly decline in obligation values ​​since September 2022,” said Ned McGuire, managing director at Wilshire, in a statement declaration. “Corporate bond yields, which are used to value companies’ pension liabilities, are estimated to have risen by more than 45 basis points.”

The estimated coverage ratio of 110.8% remains the “highest in decades,” according to Wilshire’s tracking.

Liability Savior

Actuarial and investment consultancy Agilis also found that the rise in interest rates, which boosted pension discount rates by almost half a percentage point, was enough to reduce liability to offset losses in the market.

“For many plan sponsors, the reduction in liabilities most likely outweighed any asset losses, causing a renewed increase in funded status,” Agilis found. “More mature plans most likely saw a slight decline in their funded status, while those with a term of more than ten years most likely experienced slight improvements.”

However, the company warned that pension plan sponsors looking to secure their funded status gains will “want to do so quickly,” with the Fed possibly cutting rates depending on how economic data plays out in the coming weeks and months.

In April 2024, the WTW Pension Index also made a profit. Despite negative investment returns, reductions in liabilities due to higher discount rates sufficiently offset positive funding, causing the index to rise 1.3% from the previous month. On April 30, 2024, the index stood at 115.8%, marking its highest point since early 2001.

In addition, the Mercer Pension Health Pulse, which monitors the median solvency ratio of defined benefit plans in Mercer’s database, stands at 118% as of March 29, compared to 116% on December 31 of the previous year. That’s the latest quarterly data from Mercer, which notes that the solvency ratio serves as an indicator of a pension plan’s financial well-being.

In April, the overall financial health of pension plans backed by S&P 1500 companies rose one percentage point to 108%. This boost was fueled by higher discount rates, although it was tempered by a dip in equity markets. As of April 30, the total surplus was $117 billion, an increase of $3 billion from the end of March.

“The S&P 1500’s pension-funded status rose one percent in April as interest rate increases more than offset equity losses,” Scott Jarboe, a partner in Mercer’s wealth practice, said in a statement. “Stock markets fell in April as signs suggested the Fed was delaying interest rate cuts. Despite the sell-off in equities, with inflation coming in higher than expected in April, discount rates also rose sharply, leading to a good month for pensions.”

In April, the financial health of the top 100 corporate pension plans saw a $14 billion positive boost, the report said. Milliman 100 Pension Funding Index. This improvement was driven by a rise in corporate bond interest rates, which resulted in a $60 billion reduction in pension liabilities for the month. At the end of April, the PFI funded ratio rose to 103.4% from 102.2% in March, marking the fourth consecutive month of improvement in funded status.

From highlights

LGIM America’s Pensions Solutions Monitor saw few bright spots in April’s figures. The company estimates that the pension funding ratio fell during the month, with the average funding ratio estimated to have fallen from 108.2% to 107.6%.

LGIM attributed the decline in part to a decline in global equities, as tracked by the MSCI AC World Total Gross Index, which fell 3.2%, and the S&P 500, which fell 4.1%. Meanwhile, pension liabilities fell only “modestly” due to rising discount rates – not enough to offset the decline in assets, the company said.

In addition, according to Milliman’s most recent 2024 Corporate Pension Funding Study, the funding ratio of 100 U.S. public company pension plans decreased marginally from 99.4% in fiscal 2022 to 98.5% in fiscal 2023. Despite an investment return of 7.2%, it fell short of offsetting the growth in liabilities, exacerbated by a 17 basis point decline in discount rates. As a result, the pension deficit has more than doubled from $8.5 billion to $19.9 billion.

Milliman also noted that funding has improved significantly compared to the period 2008 to 2020, when deficits ranged from $188 billion to $382 billion. The current $19.9 billion deficit puts the DB plans of Milliman 100 companies close to achieving full financing.

Related stories:

US corporate pensions continue to show funding surpluses in March

Funding levels for corporate pensions soar in February

US occupational pension plans continue to improve funded status in January

Tags: Agilis, Insight Investment, LGIM America, Mercer, Milliman, Ned McGuire, October three, pension financing, Wilshire, WTW