A continued plunge in equity markets Monday, coupled with a sharp drop in bond yields, could make August one of the worst months for declines in the funded status of U.S. corporate defined benefit plans.
The typical corporate plan's funded status is likely to be closer to 75% by the end of the day than the approximate 83% pension trackers had reported at the end of July.
While the spike in market volatility over the past week could still reverse course over the remaining three weeks of August, corporate plans have suffered a severe double-edged blow since the start of the month, with sharp declines in both the S&P 500 benchmark and the yield on the 10-year U.S. Treasury bond.
The combination of lower stock prices and lower rates “couldn't be worse for my funded status,” said one executive overseeing a multibillion-dollar defined benefit plan for a Fortune 500 company, who declined to be named. He called the current market environment “the worst of all worlds.”
While some pain on the asset side was anticipated after Standard & Poor's for the first time downgraded its rating on U.S. government debt, the flood of U.S. Treasury buying on Monday — which pushed the yield on U.S. paper down by more than 20 basis points — hadn't been entirely discounted.
For the moment, markets are witnessing the paradox of money pouring in from around the world to an asset class that's just been downgraded, noted Terry Dennison, director of consulting for Mercer's U.S. investment consulting business. Whether the prevailing “fear factor on Wall Street” spreads to the rest of the economy will go a long way to determining whether today's ugly environment for institutional investors proves to be a short-term or a longer-term phenomenon, he said.
Jonathan Barry, a partner with Mercer's retirement risk and finance business, said as of Aug. 5 — before Monday's latest bout of volatility — his team had calculated the median funded status for S&P 1500 companies had tumbled to roughly 78% from the end-of-July figure of 82.6%.
Mr. Barry said depending on how markets close Monday, there could be a further decline in funded status of several percentage points.
Peter Austin, executive director of BNY Mellon Pension Services, said his data likewise show August poised to be a “very bad month,” with funded status looking set to fall again below 80% for a typical moderate-risk institutional portfolio.
On the bright side, U.S. companies remain cash-rich and earnings remain strong, Mr. Austin noted. Still, yet another “perfect storm” of falling equity markets and potentially the lowest corporate bond rates since BNY Mellon began tracking corporate pension data can only weaken the resolve of plan sponsors when it comes to maintaining DB plans, he warned.