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The Markets February 14, 2025
Corporate Pensions Continue Funding Surplus Rise in January
Many companies with pension funds in surplus are choosing to outsource the investment management of their portfolios or to offload their plan liabilities to insurers.
Reported by Matt Toledo
The average funding ratio of U.S. corporate pension funds continues to exceed 100% after growing further in January, pushing to a recent high.
According to Milliman, which tracks the funded status of the largest 100 U.S. plans through the Milliman 100 Pension Funding Index, the funding ratios of these plans rose to 105.8% at the end of January, up from 104.8% the month before. The gains are largely due to a strong equity market, as well as little change in discount rates.
This is the highest funded status level in 27 months, according to Milliman. Markets returned 1.19% in January, increasing plan assets by $9 billion to $1.308 trillion at the end of the month. Monthly discount rates, used to value plan liabilities, increased by one basis point, to 5.60%, reducing plan liabilities from $1.240 trillion in December 2024 to $1.237 trillion in January.
“The funded status surplus of the Milliman 100 plans reached a 27-month high at the end of January—the perfect start to the year as plan liabilities declined while plan assets grew after market gains exceeded expectations,” said Zorast Wadia, actuary at Milliman, in the firm’s monthly report.
Many companies with pension funds in surplus are choosing to outsource the investment management of their portfolios or to offload their plan liabilities to insurers.
“With Fed[eral Reserve] rate cuts still a possibility this year, prudent asset-liability management remains a key directive for plan sponsors to preserve the funded status gains achieved thus far,” Wadia said.
According to Agilis, plan sponsors saw funded status gains of from 1% to 3% in January. With 2025 expected to be a volatile year, Michael Clark, managing director and chief commercial officer at Agilis, wrote in a note that corporate plans should lock in their gains and offload their pension liabilities.
“We anticipate that 2025 will continue to be volatile, so plan sponsors would do well to lock in gains through their investment strategies and pursuing pension risk transfer strategies,” Clark said.
According to Mercer, which tracks the pension funded status of S&P 1500 companies, these funds saw their solvency increased to 110% in January from 109% in December 2024. Plan surpluses increased to $158 billion in January from $135 billion last December.
Wilshire, which tracks the funded status of corporate plans in the S&P 500, found that the funding surplus increased by 1.8% in January, to 105.4%, the highest funded status level tracked by Wilshire in more than a year, up from 103.6% at the end of December. Over the trailing 12 months, funded status increased by 8.8%.
LGIM America, which tracks the health of a hypothetical corporate defined benefit plan through its Pensions Solutions Monitor, finds that a plan with a 50/50 stock/bond asset allocation saw its funding ratio increase to 112.6% in January from 111.1% last December.
Aon, which tracks the funded status of pension plans of companies in the S&P 500, reported that the funded status of these plans increased to 103.4% in January from 102.5% in December. Plan assets increased by $12 billion, while liabilities decreased by $1 billion.
According to WTW, which tracks the funded status of U.S. retirement plans through its WTW Pension Index, funded status rose to its highest value since mid-2000. In January, the index rose to 124.6, up from 122.2 in December, as strong investment returns offset an increase in liabilities. The index, based on the performance of a hypothetical plan with a 60/40 portfolio, saw investment returns of 2.2% in January. Liabilities increased by 0.2%, due to changes in discount rates, resulting in a 2.0% increase in pension funded status.
October Three Consulting tracks pension finances for two hypothetical funds: Plan A, with a 60/40 allocation, and Plan B, with a 20/80 allocation. The firm found that the funding of Plan A improved more than 1%, while Plan B improved less than 1% in January.
Interest Rates
Interest rates have long been an uncertainty for plan sponsors. Since the Federal Reserve started raising rates in 2022, higher interest rates have contributed to an increase in corporate funded status. Pension surpluses should not be affected by further rate cuts in the near future: Bond markets now predict no cut to the benchmark federal funds rate until December 2025. The strong Consumer Price Index report this week, showing a 3% increase in inflation driven by higher food and energy prices, reinforces the sentiment that the Fed is unlikely to resume rate cuts soon.
“The Federal Reserve paused its campaign of interest rate cuts resulting in minimal month-over-month changes in corporate bond yields—used to value corporate pension liabilities,” said Ned McGuire, a Wilshire managing director, in a statement. “The positive returns across asset classes helped maintain the month-end aggregate funded ratio estimate above 100%.”
Still, there are many uncertainties ahead for plan sponsors, such as the economic impact of federal policies, including tariffs, as well as the direction of interest rates.
“Markets will be closely watching for the economic impact of the recently announced tariffs and other potential executive actions,” said Matt McDaniel, a partner in Mercer’s wealth practice, in a statement. “The Fed continues to take a ‘wait and see’ approach with interest rates, leaving plan sponsors a lot of uncertainty to process to start the new year.”
