The average funded status of corporate pension plans sponsored by Russell 3000 companies rose an estimated 2.1 percentage points in the third quarter to 85.4% as of Sept. 30, said a new report from Barrow, Hanley, Mewhinney & Strauss.
The funding increase was driven by an estimated 3.1% investment return, which outpaced a 0.5% increase in liabilities for the quarter. Discount rates declined four basis points over the quarter to 3.85%.
Although the average funded status has continued to rise since the end of 2016, when it was 81.3%, it is still below the recent high of 87.8% as of Dec. 31, 2013, the report noted.
By sector, financials had the highest funded status as of Sept. 30 at 95.5%; followed by industrials at 84.5%; materials, 84.2%; information technology, 83.8%; consumer discretionary, 83.2%; consumer staples, 82.9%; health care, 82.9%; utilities, 82.7%; telecommunications, 82.3%; energy, 81.6%; and real estate, 81.5%.
Within financials, banks had a funded status of 103.8% as of Sept. 30, which is not surprising given "solvency rules require banks to reduce their reported capital by the amount that their pensions are underfunded," the report said. On the flip side, airlines, which have "more lenient funding rules," had the lowest average funded status for the third quarter at 69%, the report also said. Specifically, airlines use higher effective interest rates for calculating liabilities and have a longer period of time to amortize benefit liabilities, said Jeffrey Passmore, director, client portfolio manager, liability-driven investing strategist, at , in a telephone interview.
Mr. Passmore added that the average funded status received a last-minute boost from a market rally after the administration released its tax plan Sept. 27. On Sept. 25, the average funded status was 84.9%, he said.