Pension plans sponsored by S&P 1500 companies maintained their 83% funded status last month, according to Mercer. The estimated aggregate deficit fell $1 billion from April to $391 billion as of May 31, the consulting firm noted.
Since 2016, the aggregate deficit has fallen $17 billion from $408 billion. Estimated aggregate assets for May for all plans in the S&P 1500 index were $1.9 trillion.
Mercer found that a decrease in discount rates was offset by positive equity markets. Typical discount rates fell 12 basis points to 3.82%, according to Mercer, while the S&P 500 index gained 1.2% and the MSCI EAFE index gained 3.1%.
“While interest rates are almost back down to pre-election levels, those plan sponsors who follow a glidepath investment strategy were more likely to take advantage of higher interest rates after the election than those plan sponsors that use more traditional investment strategies,” Jim Ritchie, a partner in Mercer’s Wealth business, said in a statement. “Interest rates initially spiked about 50 basis points after the election and have slowly declined since the beginning of the year.”
Ritchie added that plan sponsors who use a glidepath strategy probably bought long-term bonds in November when they were cheaper “and are reaping the rewards of declining interest rates while also improving their risk profile.”
High-quality corporate bond yields were at 3.82% as of May 31, according to Mercer, and the S&P 500 was at 2,411.80.
Mercer’s U.S. Pension Buyout Index found that in April, the average cost of a buyout increased from 104.6% to 105.1%. Even so, Mercer noted that a buyout may be “significantly more attractive compared to the balance sheet liability” as insurers have adopted new mortality tables from the Society of Actuaries that introduce higher longevity expectations.
Also adding to the attractiveness of a buyout, according to Mercer, is the Trump administration’s expected shift toward fiscal stimulus and tighter monetary policy, which should “cause an increase in funded status for defined benefit pension plans, leading to more plan termination and elective buyouts.”
— Read DC Plans’ Goal Is to Help Employees Retire on Time: T. Rowe Survey on ThinkAdvisor.