LGIMA found in its monthly pension solutions monitor that the funding ratio of a typical corporate pension plan decreased by 1.5 percentage points to 89.9% in June, primarily due to declining Treasury yields.
LGIMA estimated U.S. Treasury rates fell by 17 basis points while credit spreads tightened by 3 basis points, resulting in the average discount rate dropping by 20 basis points.
Liabilities for the typical plan increased by 2.8%, while plan assets with a traditional 60% equity/40% bond asset allocation increased by about 1.1%, LGIMA said.
As measured by Mercer, the monthly estimated aggregate funding ratio of defined benefit plans sponsored by S&P 1500 companies decreased by 1 percentage point to 94% as of June 30 because of a decrease in discount rates to 2.67% from 2.84%, partially offset by an increase in U.S. equity markets,
The estimated aggregate deficit of pension fund assets of S&P 1500 companies totaled $153 billion as of June 30, up $47 billion from the end of May.
"For the second consecutive month, pension funded status took a small step back," said Matt McDaniel, a partner in Mercer's wealth business, in a news release. "After a big leap in funded status earlier this year, funded status slowly crept lower in the second quarter on declining interest rates."
Mr. McDaniel added: "Even though the Fed recently bumped up the timeline for rate increases and increased inflation expectations for the year, U.S. equity markets were unfazed reaching fresh all-time highs and interest rates continued their slide. Right now, nothing seems to be slowing down the bull market, but plan sponsors should be prepared for anything as we all know the tide can turn quickly."
According to Northern Trust, the average funding ratio for S&P 500 companies with defined benefit plans decreased to 93.4% in June from 95% the month before.
The change was driven by global equity markets rising about 1.3% over the course of June being offset by the discount rate decreasing to 2.49% from 2.73% during the month.
“Even though funded ratios declined in June, the year to date increase in funded ratio from 87% to 93% is significant. Discount rates have also increased by almost 30 (basis points) during the first half of the year,” said Jessica K. Hart, senior vice president and head of the OCIO retirement practice at Northern Trust Asset Management, in a news release announcing the results.
“As the economy continues to reopen,” she said, “one of the main challenges facing the market is the successful passing of the baton to shift from government stimulus to rising private sector demand.”