The funded status of U.S. corporate pension plans rose in November on the back of rising discount rates, said reports from Milliman and Mercer.
The funded status of the 100 largest U.S. corporate pension plans rose 3 percentage points to 80% in November, the Milliman 100 Pension Funding index showed. Liabilities declined 4.5% to $1.72 trillion over the month, the result of a 37-basis-point rise in the discount rate to 3.98%. Asset values declined 0.8% to $1.38 trillion, the result of a -0.38% investment return. The last time the monthly funding ratio was at or above 80% was Dec. 31.
In another monthly report, Mercer found the estimated aggregate funding ratio of pension plans sponsored by S&P 1500 companies rose 4 percentage points to 81% in November. A 45-basis-point-increase in the discount rate to 4.11% offset mixed equity returns. The S&P 500 index and MSCI EAFE index returned 3.4% and -2.2%, respectively, in November.
“The surprising election win by Donald Trump appears to have started the long-awaited increase in long-term interest rates, which has greatly increased the funded status of pension plans,” said Jim Ritchie, a principal in Mercer's retirement practice, in a news release. “Donald Trump’s promises of lower taxes and higher infrastructure spending are being credited for the recent increase in long-term rates, which are up approximately 40 basis points since the election.”
The estimated aggregate value of pension fund assets of S&P 1500 companies totaled $1.8 trillion at the end of November, down 1.1% from October, while estimated aggregate liabilities totaled $2.21 trillion, down 6% from the previous month.
“While plan sponsors are pleased with the third straight month of funded status improvement, all eyes are on interest rates as we near the Dec. 30 measurement date," said Zorast Wadia, principal, consulting actuary and co-author of the Milliman report, in a new release. "Discount rates have climbed 66 basis points since their record low in August; now the question is whether we'll see interest rates climb above 4% by year's end."
If the 100 largest U.S. corporate pension funds achieve a median 7.2% asset return and the discount rate remains at 3.98%, the funding ratio would increase to an aggregate 82.2% by the of 2017 and 84.4% by the end of 2018, Milliman predicted.