Reports paint improving corporate funding picture in September

The funded status of corporate defined benefit plans increased about two percentage points in September due to a combination of asset gains and liability decreases, according to monthly reports from BNY Mellon Asset Management and Milliman.

The funded status of the 100 largest corporate DB plans studied by Milliman was 74.5% at the end of September, up from 72.4% in August, while a BNY Mellon report said the typical corporate plan's funded status increased 1.8 percentage points to 75%.

Plans received some liability relief in the last two months following the worst four-month stretch, April-July, in the 12-year history of Milliman's report that saw liabilities increase by $304 billion, said John Ehrhardt, principal and consulting actuary at Milliman and co-author of the study. The discount rate increased nine basis points to 4.08% in September, resulting in a $30 billion reduction in the 100 plans' pension benefit obligation.

“I was surprised a little to see interest rates jump a little bit in the last two months,” Mr. Ehrhardt said in a telephone interview. “You can't expect much change in the discount rate.”

Plans have ramped up their interest in equity hedging strategies in recent months as fixed-income returns struggle in a low-interest-rate environment. Mr. Ehrhardt added protecting against interest-rate downside at this time is “like closing the barn doors after the cows leave.” The cumulative asset return over the last 12 months has been 15%, but the funded status has actually dropped to 74.5% from 77.4%.

Total pension liabilities decreased to $1.778 trillion in September while pension assets increased to an aggregate $1.324 trillion in Milliman's report.

Jeffrey Saef, managing director at BNY Mellon Asset Management and head of the investment strategy and solutions group, thinks September was just a “lull” as investors wait for more certainty surrounding the U.S. elections and looming fiscal cliff. He added that “earnings will be challenged” in the coming weeks, the eurozone continues to show weakness and that an economic slowdown in Asia could be the biggest factor affecting markets in the coming months.

“The market will tread water until the election results,” Mr. Saef said in a telephone interview.

In September, international developed markets returned 3%, outpacing the U.S. equity gains of 2.6%. The discount rate increased six basis points to 3.78%. The Russell 3000 is up 16.1% year-to-date Sept. 30 while the MSCI EAFE is up 10.1%. For the month, the typical plan saw a 1.7% increase in assets and 0.7% decrease in liabilities. Year-to-date assets are up 10.8% and liabilities, 11.3%.