Mixed Results for Corporate Pension Funded Statuses

The funding status for U.S. corporate pension plans in August saw mixed results, according to pension fund trackers. In general, equity markets experienced a positive performance over the month, and plan liabilities increased due to falling discount rates.

The Milliman 100 Pension Funding Index recorded its largest monthly drop this year, with the funded ratio dropping to 102.8% at the end of August from 103.6% at the end of July. Milliman found that although August’s investment gains of 1.81% lifted the plans’ market value by $17 billion, to $1.347 trillion at the end of the period, it was not enough to compensate for a 20-basis-point decline in discount rates for the month.

“As in July, both assets and liabilities increased during the month, but investment gains weren’t enough to offset liability increases,” said Zorast Wadia, author of the report, in a statement. “With markets falling from all-time highs and discount rates starting to show declines, pension funded status volatility is likely in the months ahead, underscoring the prudence of asset-liability matching strategies for plan sponsors.”

Russ Kamp, managing director of Ryan ALM Inc., wrote in blog post that falling rates are not a “panacea” for pension plans, unless the drop in rates rallies equity markets to a greater extent than the drop in rates impacts the growth in pension liabilities.

The WTW Pension Index also found that funded status decreased slightly in August. Like Milliman, WTW found that positive investment returns were more than offset by increases in liabilities due to decreases in discount rates, resulting in an index level of 116.0, a decrease of three-tenths of a percentage point over the prior month.

‘Tumultuous Month’

Agilis noted that most pension plans experienced relatively no change or a marginal decline in funded status in August as market returns matched or lagged slightly behind liability growth, depending on asset allocation. According to its analysis, Agilis reported Treasury yields moved lower again in August as the market reacted to Federal Reserve Chair Jerome Powell’s indication that the Fed will cut rates in September.

Agilis also stated that August was a “tumultuous” month for equity investors, with disappointing economic data and a weak U.S. jobs report coupled with an interest rate hike by the Bank of Japan. U.S. and international equities ultimately rebounded to post monthly gains, Agilis found.

“As we’ve been saying all year, volatility is going to be the biggest driver in pension plan funded status during 2024 and we continue to see that playing out,” said Michael Clark, managing director at Agilis, in a statement. “While August asset returns ended positive, the road was not without some significant bumps. September is keeping on theme with markets down in the first week. Any piece of economic data is causing reverberations in the markets and with interest rates, and we expect that will continue in the lead up to September’s Fed meeting and the November elections in the U.S.”

Mercer concluded in its analysis of S&P 1500 companies that the estimated aggregate funding level of pension plans remained level in August at 108% as result of a decrease in discount rates, offset by an increase in equity markets.

“Pension funded status for the S&P 1500 in August remained level due to equity market gains and lower interest rates,” said Scott Jarboe, a partner in Mercer’s wealth practice, in a statement. “Signals from the Fed indicate that rate cuts are imminent, which may result in lower short-term interest rates. However, the ultimate impact on pension plan funded status remains unclear as long-term interest rates play a more significant role.”

Jarboe added that plan sponsors should take a careful look at their plan’s interest rate risk, as plans with significant interest rate exposure may see decreases in funded status if long-term rates decline.

Asset Rise Still Outpaced Liabilities, per Wilshire

Meanwhile, a few firms found that funded statuses increased in August.

LGIM America’s Pension Solutions Monitor estimated that pension funding ratios increased slightly to 109.9% from 109.5% last month. While it found that both global equities increased 2.6% and the S&P 500 increased 2.4%, it recorded that plan discount rates were estimated to have decreased 19 basis points over the month, driven by the Treasury component falling 16 bps and the credit component tightening 3 bps.

Wilshire also found that the average funded ratio increased by an estimated 0.4 percentage points, ending the month at 102.3%. The increase in funded ratio resulted from a 1.7% increase in asset value, slightly offset by a 1.3% increase in liability value, according to Wilshire.

This is the eighth consecutive month that asset values rose more than liability values, Wilshire found.

Aon’s Pension Risk Tracker similarly found that the average funded ratio for pension plans increased to 100.7% from 97.8%. Aon recorded that the funded status improved by $46 billion, driven by liability decreases of $30 billion compounded with asset increases of $16 billion.

Aon also found that asset returns were up throughout August, ending the month with a 2.0% return.