Funded Status of U.S. Corporate Pension Plans Continues to Improve in May

In May, the financial health of U.S. corporate pension plans experienced a marked improvement, continuing a positive trend seen over the past five months, according to a round-up of the country’s pension watchers. 

The main reasons for the positive funding trends in May across various corporate defined benefit plans included positive economic indicators, strategic investment approaches such as cash-flow-driven strategies and resilience in market performance despite lower interest rates.

“May’s improvement is the fifth month in a row of funded ratio improvement,” says Zorast Wadia, principal and consulting actuary at Milliman.

This month’s strength of funding ratios, Wadia noted, was driven by equity markets that were strong enough to counter a decline in discount rates, which dropped about 13 basis points to 5.53% from 5.68% on average. That was a turn from April, when discount rates increased by 44 basis points, helping to create that month’s funded status boost.

“May’s improvement was very different as April was a very poor return month,” Wadia says. “That was the worst return month of the year. January, February and March were generally stable or positive return months.”

Similar to those earlier months, Wadia says May’s assets increased more than liabilities. As a result, there was a $4 billion pickup in the funded status, he says, representing a percentage change from 103.1% to 103.4%.

“So again, we’re still in surplus territory and there continues to be an improvement,” he says.

Positive Funded Status

October Three reported similar positive trends, with higher stock markets counterbalancing the impact of lower interest rates.

The actuarial service provider’s analysis of two model plans revealed that Plan A, a traditional plan with a 60/40 asset allocation, saw a significant improvement of over 1% in May, culminating in an 8% increase for the year.

The Plan B portfolio, which is more focused on retirees and emphasizes corporate and long-duration bonds, recorded a modest gain, bringing its year-to-date improvement to nearly 2%.

LGIM America’s Pension Solutions Monitor also documented an increase in pension funding ratios, rising to 108.8% from 107.6% over the month. The firm attributed the increase to strong performances in equity markets, with global equities rising by 4.1% and the S&P 500 by 4.8%.

The average discount rate decreased by 20 basis points, largely due to a reduction in the Treasury rates. These factors contributed to a 3.5% increase in plan assets, surpassing the 2.3% rise in liabilities and leading to an overall improvement in funding ratios, according to LGIM.

Wilshire’s analysis indicated just a slight increase in the aggregate funded ratio for U.S. corporate pension plans, rising by 40 basis points to 100.6% by the end of May. This increase was driven by a 2.6% rise in asset values, which more than offset a 2.2% increase in liabilities. Despite the drop in corporate bond yields increasing the liability value, the positive returns from most asset classes contributed to the improved funded ratio.

Strong Economics

Michael Clark, chief commercial officer at Agilis, agreed that May was a positive month for pension plans, buoyed by positive economic indicators and strong market performance.

“Even though discount rates were down on the month, the corresponding increase in liabilities was generally not enough to bring funded status down,” says Clark. “We keep beating the drum that plan sponsors need to take a serious look at how well they are hedged against interest rates, and we haven’t changed our tune.”

WTW reported that its Pension Index reached its highest level since late 2000, reflecting a 0.5% increase in May. This improvement was driven by strong investment returns, particularly in the equity portion of the benchmark portfolio, which saw a 4.6% return. For WTW, fixed-income investments also performed well, with long Treasury bonds and long corporate bonds leading the gains.

Adding to the optimistic outlook, Adam Turnquist, chief technical strategist for LPL Financial, provided a broader market perspective. He noted that the S&P 500’s 4.8% rise in May contradicted the traditional “Sell in May and Go Away” strategy, suggesting that the adage might be less relevant in today’s markets.

Turnquist highlighted that April’s losses were more than offset by May’s gains, underscoring a robust market rebound that bodes well for the future performance of pension plan assets.

Finally, Insight Investment highlighted a 1.1% increase in funded status, moving to 114.6% in May from 113.5% in April. This gain was, again, primarily driven by equity outperformance despite a modest decline in Treasury rates.

“At prevailing funded status levels, more certain approaches to meeting benefit obligations can be implemented,” said Ciaran Carr, head of client solutions group in North America at Insight Investment. “Cash-flow-driven investment strategies seek to incrementally improve the surplus position with a lower likelihood of incurring future funded status deficits.”