The average U.S. corporate pension plan funding ratio rebounded during the second quarter due to markets rallying, two reports estimate.
A report from Aon estimates that the average funding ratio for S&P 500 companies rose to 84.9% at the end of the second quarter from 81.2% at the end of the first quarter.
Aon attributed the increase to strong asset performance over the quarter.
During the quarter ended June 30, the funding deficit decreased by $67 billion, to $341 billion from $408 billion.
Overall pension assets were up 11.1% over the quarter. Return-seeking assets rebounded in the second quarter. The Russell 3000 index returned 22%. Bond performance was also strong during the quarter, with the Barclays Capital U.S. Long Credit index returning 11.1%.
“Despite the strong equity market performance during Q2 where a large portion of the losses experienced in March were recovered, pension plan funded ratios remain down on the year as interest rate declines drove up pension liabilities,” said Joe McDonald, Aon senior partner, in a news release.
“This familiar refrain once again emphasizes the importance of interest rate hedging generally; but also, the importance of understanding your risk exposure across risk-free rates and credit spreads, where performance diverged significantly during the first half of the year,” Mr McDonald said.
“The sharp decline in rates may prompt some plan sponsors to consider implementing lump-sum programs before year-end, including innovative solutions targeting active employees with frozen pensions,” he said.
Separately, analysis by Willis Towers Watson estimates that the aggregate funded status for the defined benefit plans of 366 Fortune 1000 companies was 82% as of June 30, up from 79% as of March 31. The firm attributed the rebound to improvements in the equity and bond markets, which offset liability increases attributable to declining interest rates.
Willis Towers Watson projected the pension deficit to be $325 billion as of June 30, an improvement from $365 billion as of March 31. Pension obligations increased to $1.84 trillion as of June 30, from $1.76 trillion as of March 31.
Pension plan assets increased to $1.52 trillion as of June 30 from $1.4 trillion at the end of the first quarter.
“Improvements in the financial markets during the past three months helped to erase nearly 40% of the loss in funded status that corporate pension plans suffered in the first quarter,” said Joseph Gamzon, senior director-retirement at Willis Towers Watson, in a news release. “And, if not for a drop in corporate interest rates during the second quarter, plans would have recouped even more of the ground they lost.”