Funding ratios for U.S. corporate pension plans dropped in August, according to reports from Legal & General Investment Management America, Wilshire Consulting and Northern Trust Asset Management.
LGIMA found the funding ratio of a typical corporate pension plan fell by 5.4 percentage points to 76.9%, primarily driven by a sell-off in global equities and a sharp decline in U.S. Treasury rates. LGIMA estimates Treasury rates decreased by 55 basis points, while credit spreads widened by 13 basis points, resulting in the average discount rate falling 42 basis points.
Liabilities for the typical plan were up 6.67%, while plan assets with a traditional 60% equity/40% bond asset allocation decreased by roughly 0.4%, LGIMA said.
As measured by Wilshire, the aggregate estimated funding ratio for U.S. pension plans sponsored by S&P 500 companies decreased by 3.8 percentage points to end the month of August at 81.3%, which is down 11.4% percentage points over the trailing 12 months.
The monthly change in funding resulted from a 7% increase in liability values partially offset by a 2.1% increase in asset values. The aggregate funded ratio is estimated to be down 6.2 percentage points year-to-date.
“August’s decrease in funded ratio was driven by the perfect storm of economic forces for corporate pension plans: falling discount rates and negative equity returns,” said Ned McGuire, managing director and a member of the pension risk solutions group of Wilshire Consulting, in a news release announcing the results.
“August’s 3.8 percentage-point decrease in funded ratio is the second largest monthly decrease this year and fourth monthly decrease in 2019.”
According to Northern Trust, the average funding ratio for S&P 500 companies with defined benefit plans decreased to 82.5% in August from 86% the month before.
Global equity markets were down about 2.4% during the month and drove the change, while the discount rate decreased to 2.56% from 2.99% during the month.
“During August, pension plans experienced downward pressure on both the asset and liability side as rates declined and equity markets faltered,” said Jessica Hart, head of the OCIO retirement practice at Northern Trust Asset Management, in a news release announcing the results. “Recession fears have escalated as the yield curve inverted and trade tensions escalated. Pension plans that have invested in long bonds would have benefited from its favorable performance as rates at the long end of the curve have declined.”
