PLANSPONSOR included NEPC’s Pension Monitor in a recent article.
The funded status of U.S. corporate defined benefit (DB) plans declined in June, with Insight Investment measuring it at 94%.
The firm says liabilities increased by 2.3% as discount rates fell approximately 21 basis points (bps)—largely due to a decline in Treasury rates. Assets increased by 1.2% due to positive equity and fixed-income performance.
According to Wilshire’s estimates, the aggregate funded ratio for corporate DB plans decreased 1.8 percentage points month-over-month to 92.7% as of June 30. Ned McGuire, managing director at Wilshire, noted that June marked the first decrease in DB plan funded status since October.
Both Wilshire and LGIM America calculated a decrease of 20 bps in Treasury yields for the month, which increased pension plan liabilities. LGIM America estimates that pension funding ratios decreased approximately 1.5% throughout June to 89.9%. Overall, liabilities for the average plan increased 2.8%, while plan assets with a traditional 60/40 asset allocation rose approximately 1.1%, according to LGIM America’s Pension Solutions Monitor.
The average funded ratio of corporate pension plans declined in June from 95% to 93.4%, according to Northern Trust Asset Management (NTAM). Higher liabilities due to lower discount rates have offset the positive equity returns. NTAM says global equity market returns were up approximately 1.3% during the month, and the average discount rate decreased from 2.73% to 2.49% during the month, leading to higher liabilities.
Estimates differ among firms because of differences in the sampling of companies and modeling assumptions used.
DB plans could also see differences in funded status changes depending on their portfolio strategies and open or closed status. “A typical pension plan may see little change in funded status for the month of June, given positive asset returns will largely be offset by declining discount rates. However, pension funded status performance for June will vary depending on the type of equity and fixed-income holdings. Plans with equity holdings that outperformed the liability growth over the month will have fared better. Plans that are underfunded or have few liability-matching bonds will have fared worse,” River and Mercantile says in its “US Pension Briefing – June 2021.”
The model plans October Three tracks were steady to down in June, according to its Pension Finance Update. However, Plan A dropped 1% last month, and the more conservative Plan B was flat last month. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation and a greater emphasis on corporate and long-duration bonds.
Funded status news is more positive for the second quarter and the year. Barrow Hanley Global Investors estimates that corporate pension plan funded ratios increased to 97.3% as of June 30, up from 95.4% as of March 31. It says this is because strong asset returns more than offset increases in liabilities.
Jeff Passmore, liability-driven investment (LDI) strategist at Barrow Hanley, says, “Funded status continues to improve, despite liability increases driven by lower discount rates. This quarter saw gains across all monitored asset classes with the strongest performance in equities and real estate. Many plan sponsors have crossed funded ratio thresholds that will drive incremental pension de-risking.”
According to NEPC’s Pension Monitor, U.S. corporate pension plans focused on hedging interest rate risk experienced modest gains in funded status in the second quarter. With Treasury yields falling over the quarter, plan liabilities increased, likely outpacing gains from the robust equity market for plans focused on a total-return asset policy. During the second quarter, the funded status of a total-return plan declined by 1.9 percentage points, underperforming the LDI-focused plan, which improved by 2 percentage points.
Both model plans October Three tracks remained in the black for the year, with Plan A up more than 10% and the more conservative Plan B up nearly 3%.
Jessica Hart, head of the outsourced chief investment officer (OCIO) retirement practice at NTAM, says the year-to-date increase in funded ratio her firm measured—from 87% to 93%—is significant. “As the economy continues to re-open, one of the main challenges facing the market is the successful passing of the baton to shift from government stimulus to rising private sector demand,” she says.
Michael Clark, managing director and consulting actuary with River and Mercantile, says, “Even though rates have come down over Q2, there is still a strong likelihood that we’ll see them reverse course and increase again before year-end. It will be telling when companies release Q2 quarterly earnings. If those reports prove strong, watch for rates to pop back up sooner rather than later. Strong equity performance coupled with increasing rates could provide additional funded status increases in 2021 for plan sponsors.”