The funded status of U.S. corporate pension plans declined in June, the result of turbulent markets and rising liabilities following the Brexit vote, said reports from BNY Mellon and Mercer.
The funded status of the typical U.S. corporate pension plan declined 2.1 percentage points to 78.1% in June, the lowest month-end funded status in 2016, said the BNY Mellon Institutional Scorecard. Liabilities increased 4% over the month, the result of a 25-basis-point decrease in the discount rate to 3.66%, and outpacing a 1.5% increase in assets.
According to Mercer, the estimated aggregate funding ratio of defined benefit plans sponsored by S&P 1500 companies declined 3 percentage points to 76% in June, also the lowest month-end funded status in 2016.In a quarterly report, UBS Asset Management said the funding ratio of a typical U.S. corporate DB plan declined approximately 3 percentage points to 80% in the quarter ended June 30, as a 6.1% increase in liabilities outpaced investment returns of 2.1% of the quarter.
“The U.K.'s decision to leave the European Union (on June 23) certainly brought some volatility to the market,” said Andrew Wozniak, head of fiduciary solutions at BNY Mellon Investment Management, in a news release. “Global equity markets have rebounded nicely since the initial sell-off following the vote, but the same cannot be said about fixed-income markets, as yields have remained quite low. We're seeing that sponsors who have employed liability-driven investing strategies continue to be insulated from these types of market shock events.”
Among the various asset classes that BNY Mellon tracks, long government/credit produced the highest return at 4.9% in June, followed by real estate investment trusts at 4.8%, emerging markets equity, 4%; global fixed income, 2.9%; emerging markets debt, 2.6%; high-yield bonds, 0.9%, large-cap equity, 0.3%; small-cap equity, -0.1%; hedge funds, -0.3%, international equity, -1.5% and private equity, -3.3%.
Year-to-date through June 30, liabilities are up 13.85% and assets, 6.5%. The funded status of the typical corporate DB plan is down 5.4 percentage points year-to-date.
The typical discount rate measured by the Mercer yield curve declined 28 basis points to 3.47% in June, while the S&P 500 index and the MSCI EAFE index returned 0.1% and -3.6%, respectively.
The estimated aggregate value of pension fund assets of S&P 1500 companies totaled $1.83 trillion as of June 30, up 0.55% from May 31, while estimated aggregate liabilities totaled $2.4 trillion, up 3.45% from May 31.
“The events in June provide a reminder of how quickly pension funded status can move when there are shocks in the market,” said Matt McDaniel, a partner in Mercer's retirement business, in a news release. “In the two trading days following the Brexit vote, we saw funded status fall a full 4 percentage points before a partial recovery before month-end. This drives home the point that plan sponsors need to monitor funded status regularly, ideally on a daily basis.”