Funding ratios of U.S. corporate pension plans fell in August due to a drop in the discount rate, two new reports show.
The funding ratio of a typical U.S. corporate defined benefit plan fell 70 basis points to 90.1% during August, said the BNY Mellon Institutional Scorecard. Mercer announced in its monthly report that the estimated aggregate funding level of defined benefit plans of S&P 1500 companies dropped to 84% at the end of August, down from 85% the previous month.
Liabilities rose 3.4% in August, canceling out the 2.6% gain in assets, due to the 21-basis-point decline in the discount rate to 4.11%, according to BNY Mellon.
The typical U.S. corporate DB plan funding ratio is now down 5.1 percentage points from the December 2013 peak of 95.2%.
The fall in the discount rate was “we believe due to a flight to safety in rates due to geopolitical tensions,” said Andrew D. Wozniak, head of fiduciary solutions of the investment strategy and solutions group within BNY Mellon Investment Management.
While the typical corporate DB plan returned 2.6% in August, the typical foundation and endowment returned 1.8% on its assets and public DB plans returned only 1.3%.
“The stronger-than-expected U.S. economic data drove the equity” returns, Mr. Wozniak said.
Domestic small-cap and large-cap equities led all returns for the month at 5% and 4%, respectively.
Mr. Wozniak said the third-highest asset class return was long government/credit bonds, which returned 3.3% for the month, giving corporate DB plans — which traditionally have higher allocations to that asset class than foundations and endowments and public DB plans — a stronger return for the month.
Mercer attributed the funded status decline to the discount rate dropping 20 basis points to 3.9%, driving liabilities upward.
“I'd say that interest rates just continue to go down,” said Jim Ritchie, a principal in Mercer's retirement practice, in a telephone interview. “Despite equities doing well, you know, funded status is deteriorating because of interest rates, and interest rates are the biggest driver.”
The deterioration continues despite an S&P 500 index return of 3.8% during August.
The collective estimated deficit of $369 billion at the end of August is up $133 billion from the end of 2013, Mercer said. The estimated aggregate funding ratio at the end of 2013 was 95%.