Three separate reports on corporate pension plan funding showed similar improvements in funded status last month.
The typical U.S. corporate pension plan's funded status rose 4.7 percentage points in October to 74.8% on the strength of a sharp rebound in global equity markets, according to BNY Mellon Asset Management.
The October gain reflected a 6.8% increase in assets, as U.S. equity markets rose 11.5% and international developed markets equities climbed 9.6%. Liabilities, meanwhile, ended the month little changed, reflecting a scant gain of one basis point in the Aa corporate discount rate, used to discount the present value of future pension plan liabilities, to 4.55%.
October's strong showing, while a rebound from September's 70.1% reading — the lowest since Mellon began tracking the data in 2006 — remained down 10.3 percentage points from the beginning of 2011.
In a news release, Jeffrey B. Saef, a managing director with BNY Mellon Asset Management and head of the company's investment strategy and solutions group, noted that progress during October in resolving the European debt crisis fueled a rebound in investor optimism. To the extent further progress is forthcoming in Europe or in U.S. budget negotiations, the improvement in funding levels could continue, he said.
In a separate report, the funding ratio for 100 of the largest U.S. defined benefit pension plans tracked by Milliman's Pension Funding index was 75.4% last month, a rise of 2.6 percentage points from the end of September.
Milliman said $44 billion in investment gains easily outpaced a $2 billion increase in pension liabilities in October.
In a news release, Milliman noted that the rebound in October followed the second worst quarterly increase in those plans' combined pension funding deficit on record. For the three months ended Sept. 30, the deficit surged by $254 billion, an amount exceeded only at the height of the global financial crisis, during the final quarter of 2008.
As of Oct. 31, the funding shortfall of the pension plans tracked by the Milliman 100 Pension Funding index came to $398 billion, down $170 billion from the end of 2010, for a drop in the funding ratio to 75.4% from 84.1%.
Low interest rates, which boost the current value of pension fund liabilities, “continue to be the elephant in the room,” said John Ehrhardt, principal, consulting actuary and co-author of the Milliman study, in a telephone interview.
Also, the pension plans of S&P 1500 companies had an aggregate funding ratio of 75% in October, up from 72% in September, according to Mercer.
The overall funding deficit fell to $471 billion as of Oct. 31 from $512 billion the previous month — which was the highest pension shortfall since Mercer began tracking the data in December 2007.
An 11% gain in equities drove the increase, said Kevin Armant, principal at Mercer, in a telephone interview. “It's definitely moving in the right direction, but as we saw in the first couple days in November and the last couple of days in October, things can move around pretty easily,” Mr. Armant said.
The increase was partially offset by the decrease in yields on high-quality corporate bonds.
The estimated assets of pension funds in the S&P 1500 were $1.39 trillion as of Oct. 31, with estimated aggregate liabilities of $1.87 trillion.
