The funded status for U.S. corporate pension plans dropped about one percentage point in February, said reports from Mercer and Wilshire Consulting.
The estimated aggregate funding ratio of pension plans sponsored by S&P 1500 companies declined 100 basis points to 78% in February on the back of negative equity returns and falling discount rates, according to Mercer. The S&P 500 index and MSCI EAFE index returned -0.4% and -2.1%, respectively, in February, while the typical discount rate measured by the Mercer yield curve declined 10 basis points to 4.03%.
“Despite the long-awaited interest rate increase announcement from the Fed in December, discount rates for pension (funds) are actually lower now than they were prior to the Fed’s action, putting downward pressure on funded status,” said Matt McDaniel, a partner in Mercer’s retirement business, in a news release. “This underscores the point that the dynamics of long corporate bond markets are quite different than the short-term rates generally targeted by the Fed. We believe plan sponsors are well advised to have a strategy that can be nimble enough to react to bond markets, ensuring that any opportunities are capitalized upon.”
In another monthly report, Wilshire Consulting found the aggregate funding ratio for U.S. corporate pension plans declined 110 basis points over the month to 78.3%, driven by a 1.6% increase in liability values. Asset values were flat for the month as positive fixed-income returns offset negative public equity returns.
Wilshire Consulting is the institutional investment consulting and outsourced CIO unit of Wilshire Associates. Wilshire's figures are the result of estimates of combined assets and liabilities of companies in the S&P 500 index that have defined benefit plans. The estimated asset allocation was 32% domestic equity, 27% long-duration fixed income, 21% international equity, 18% core fixed income and 2% real estate.