U.S. corporate pension funding ratios remained above 100% in August, according to estimates from three new reports.
First, Wilshire Advisors estimated the aggregate funding ratio of U.S. corporate plans reached 102.3% as of Aug. 31, an increase of 0.4 percentage points above the 101.9% funding ratio estimated as of July 31.
"August's funded status improved due to the continued increase in asset values, with most asset classes posting positive monthly returns despite an early month drawdown in global equity,” said Ned McGuire, managing director at Wilshire, in Sept. 4 news release.
“At the beginning of the month, U.S. equity experienced a nearly -8.5% pullback due to concerns about a slowdown in economic growth following the release of the July labor market report, which missed expectations, and the worst loss for the Nikkei 225 since Black Monday in 1987,” McGuire said. “However, this drawdown was short-lived, as stocks quickly recovered, with multiple equity indices reaching all-time highs later in the month.”
McGuire also cited expectations that the federal funds rate will be cut starting in September, leading to yields decreasing in anticipation.
“Corporate bond yields, which are used to value corporate pension liabilities, have fallen for four consecutive months, cumulatively by more than 50 basis points,” he said. “Despite the increase in liability values due to falling rates, asset values have risen more than liability values for the eighth consecutive month.”
Wilshire's assumed asset allocation is 32% long-duration fixed income, 28% core fixed income, 24% domestic equity, 14% international equity and 2% real estate.
Separately, Legal & General Investment Management America estimated the average funding ratio of the typical U.S. corporate pension plan increased to 109.9% as of Aug. 31 from 109.5% a month earlier.
LGIMA's Pension Solutions Monitor cited the MSCI ACWI Total Gross index and S&P 500 index returning 2.6% and 2.4%, respectively, during August.
The positive performance offset a rise in liabilities that the monitor said was the result of an estimated decrease in discount rates of 19 basis points in the month ended Aug. 31, driven by the Treasury component falling 16 basis points and the credit component tightening by 3 point.
The monitor assumes a typical liability profile using a duration of 12 years and an asset allocation of 50% MSCI ACWI index and 50% Bloomberg U.S. Long Government/Credit index.
LGIMA estimated that plans with that profile would have seen asset values increase by 2.3 percentage points, offsetting a 1.9-percentage-point rise in liability values.
Finally, Aon said its estimated S&P 500 aggregate pension funding ratio fell slightly to 100.7% as of Aug. 31 from 100.8% as of July 31.
Aon said liability values rose more than asset values during the period, citing the decrease in the interest rates used to value pension liabilities to 4.98% as of Aug. 31 from 5.14% a month earlier.
