U.S. corporate defined benefit (DB) plans probably would rather forget this past winter, according to new research from Cerulli Associates.
After tens of billions of contributions and higher discount rates improving funded status for much of 2018, volatility negatively affected corporate DB plans in the last days of the year.
“Significant volatility in financial assets and interest rates whipsawed these institutions just as underfunding concerns were beginning to ease early in the fourth quarter of 2018,” Cerulli states
Through the first three quarters of 2018, the funded status of the average corporate DB plan steadily improved from a more than 85% funded ratio to the low-to-mid 90s in September, according to Cerulli. This is largely because many plans – especially larger ones – took steps to de-risk pension liabilities by freezing benefit accruals and/or closing to new participants after facing significant pressure to immunize the volatility of liabilities on corporate balance sheets and income statements.
Then, financial market volatility in late 2018 – brought on largely by concerns of slowing global growth – changed the game “seemingly overnight,” according to Cerulli.
According to the Milliman Pension Funding Index, November to December was the largest percentage-point decline for the year, in many cases wiping out 2018 percentage point improvements in funded ratios in one month.
Then, in the first few months of 2019, as the U.S. Federal Reserve Board appeared to change track and hold off on further increases in short-term interest rates, financial assets rebounded and volatility largely became a positive.
Despite the bounce back, Cerulli finds that these corporate DB plans are feeling shell-shocked.
“Recalling the 2007–2008 global financial crisis losses (which, on the eve of the crisis, was the last time corporate pension plans were fully funded), CIOs tell Cerulli that their companies cannot stomach such volatility again,” the research states.