U.S. corporate pension plans' funded status rose about 1 percentage point in July, said reports from Mercer and Wilshire Consulting.
The estimated aggregate funding ratio of pension plans sponsored by S&P 1500 companies rose 100 basis points in July to 77% as equity market gains outpaced a 12-basis-point drop in the discount rate to 3.35%, the second lowest reading in more than 50 years, according to Mercer. January 2015 saw the lowest reading at 3.33%. The S&P 500 index and MSCI EAFE index returned 3.6% and 5%, respectively, in July.
The estimated aggregate value of pension fund assets of S&P 1500 companies totaled $1.88 trillion at the end of July, up 2.7% from June, while estimated aggregate liabilities totaled $2.44 trillion, up 1.7% from the previous month. The funded status is down 5 percentage points from Dec. 31.
“Long-term interest rates continue to drop, increasing the liabilities on plan sponsors' balance sheets,” said Jim Ritchie, a principal in Mercer's retirement practice, in a news release. “While the drop in rates this month was offset by strong equity returns, the S&P 500 peaked on July 22 and stagnated for the rest of the month. If these trends continue, pension plans will create quite a bit of heartburn for plan sponsors at year-end when sponsors have to update the funded status of their plans on their financial statements. Many plan sponsors that are starting their budgeting for 2017 are having a difficult time deciding how to budget for pension expense in 2017. We are seeing more and more plan sponsors move to derisking strategies as well as other financial management strategies to effectively deal with this volatility. Those plan sponsors that are waiting for interest rates to rise before implementing a sound dynamic derisking policy may be waiting a long time.”
Meanwhile, Wilshire Consulting's analysis found the aggregate funded status for U.S. corporate pension plans increased by 80 basis points in July to 76.3%. Asset values increased 2.9% during the month due to positive returns for most asset classes, while liabilities increased 1.9%, Wilshire said. The funded status is still down 5.1 percentage points from Dec. 31, according to Wilshire.