Pension Funding in July Mostly Flat, With Some Dips

The funded status of corporate pensions stayed steady in July, but some pension trackers saw their first declines in months. Across the board, strong investment returns were offset by a decline in discount rates used to value pension liabilities.  

Equities were strong in July, although the month saw a decline in tech and artificial intelligence stocks, especially the Magnificent 7. Tech darlings like Nvidia, Apple and others peaked mid-month, with some large- and mega-cap tech stocks declining by double digits in July.  

Most investment consultants and research firms that track the funded status of corporate pension plans found that funded status remained fairly flat or declined in some cases. For trackers that found an increase in funded status, the increases were small compared with previous months.  

October Three, which tracks the funded status of two hypothetical plans—Plan A, a 60/40 portfolio, and Plan B, a 20/80 portfolio—found that Plan A saw a one-percentage-point decline in funded status but is up eight percentage points in 2024. Plan B saw a decline of a fraction of a percentage point, and funding for that plan remains up 2% for the year.  

Looking ahead, October Three’s Brian Donohue wrote that he expects pension sponsors to use discount rates in the range of 5.0% to 5.3% to measure pension liabilities in the near term. Plans that are underfunded will likely require sharp increases in required contributions over the next two years, Donahue wrote. 

For companies considering a pension risk transfer, the time to do so is sooner rather than later, according to Donohue. “Long-term interest rates have fallen half a percent since the end of April, pushing [pension risk transfer] costs higher,” Donohue says. “If this trend continues, it would be cheaper to settle pension liabilities sooner rather than later. … In addition, the PRT market appears to exhibit ‘seasonality’ in recent years, with PRT transactions executed earlier in the calendar year tending to produce better PRT pricing for plan sponsors. Which is to say that it may be difficult to generate insurer interest and attractive pricing toward the end of 2024, as insurers fill their books for the year.” 

Minimal Declines 

According to Mercer, which tracks the funding level of corporate plans of companies within the S&P Composite 1500 Index, the funded status of these plans decreased by one percentage point in July to 108%, resulting in the funding surplus of these plans decreasing by $8 billion to $128 billion at the end of July.  

The funded status of the largest 100 corporate defined benefit plans remained unchanged in July, staying steady at 103.5%, according to the Milliman 100 Pension Funding Index.  

The funded status of plans tracked by LGIM America’s Pension Solutions Monitor declined less than half a percentage point, to 109.5% at the end of July from 109.9% in June. The PSM tracks a hypothetical 50/50 equity/bond portfolio. The monitor found that equities increased 1.6%, while plan discount rates decreased 30 basis points. Assets increased 2.5%, and liabilities increased 2.9%, resulting in a 0.4-percentage-point decline in funded status. 

Insight Investment reported that the funded status of tracked plans rose 0.6 percentage points to 114.9% during the month. Assets returned 3.0%, while liabilities rose 2.5%. Discount rates, due to a change in the risk-free rate, decreased by 15 basis points to 5.18% in the month of July from 5.33% in June.  

Wilshire, which tracks the funded status of corporate plans of companies in the S&P 500 Index through its FRSE Pension Liability Index, finds that the funded status of these plans increased by 0.1 percentage points in July, to 101.5%. Pension assets increased 2.3% in value, while liabilities increased by 2.2%, resulting in a 0.1-point increase in funded status.  

WTW’s Pension Finance Index, which tracks the funded status of a hypothetical plan, declined for the first time in six months. The index declined by 0.6 points at the end of July to 116.3%, a result of pension liabilities outpacing investment returns due to declines in discount rates.  

Discount Rates Fall, With Rate Cuts on the Horizon 

Discount rates used to value pension liabilities declined in the month, and Treasury yields also fell with the expectations that a Federal Reserve rate cut is on the horizon, according to investment consultant Agilis’ monthly pension briefing.  

“While July was a positive month for pension plan funded status, despite decreasing discount rates, August has so far been off to a rocky start,” said Michael Clark, managing director of Agilis, in a statement. “With some poor economic data posting, most notably unemployment, markets were down significantly to start the month, and rates were down close to 0.50% on the anticipation of a large Fed Funds Rate cut in September.” 

Discount rates measured by the Mercer Yield Curve for plans within the S&P 1500 Index decreased to 5.25% from 5.48%. 

“Pension funded status for the S&P 1500 decreased one percent in July, driven by a drop in interest rates following the latest Fed meeting and indications that a rate cut may be coming soon,” said Matt McDaniel, a partner in Mercer, in a statement.  

Investors are expecting a rate cut at the next Fed meeting in September, with most economists expecting a cut of 0.5 percentage points to the federal funds rate. 

“July’s funded status showed a muted change due to nearly equivalent positive returns for both assets and liabilities,” said Ned McGuire, managing director at Wilshire, in a statement. “Corporate bond yields, used to value corporate pension liabilities, fell to their lowest level since the first quarter of 2024, driven by expectations of U.S. rate cuts from the Federal Reserve.”