The financial health of corporate pension plans, as indicated by the aggregate funding ratio of S&P 500 Index company pensions, increased by nearly two percentage points in fiscal 2018, according to Wilshire Associates’ 2019 Corporate Pension Funding Report.
Specifically, the report shows that the aggregate ratio of pension assets-to-liabilities, or funded ratio, for S&P 500 companies sponsoring corporate defined benefit pension plans increased by 1.7 per cent to 87.5 per cent at the end of fiscal 2018 from 85.8 per cent at the end of fiscal 2017.
“Negative aggregate returns on investment and benefits paid drove asset values lower in 2018,” says Ned McGuire, Managing Director at Wilshire. “Wilshire estimates that aggregate assets decreased to USD1,331.7 billion as of fiscal year end 2018, a decrease of over 6.5 per cent from USD1,424.8 billion as of fiscal year end 2017. Concurrently, contributions increased asset value by 4.00 per cent for the year, almost all coming from plan sponsors.”
“As interest rates rose, companies were allowed to increase their discount rates, thereby decreasing the accounting value of total pension liabilities. The median discount rate increased by 54 basis points to 4.20 per cent from 3.66 per cent, which is the primary reason for the aggregate actuarial gain, i.e. liability value decrease, of USD106.4 billion. In total, the liability value decreased by USD139.8 billion, or 8.4 per cent, due to the combination of actuarial gains and benefit payments in 2018,” added McGuire, who is also a member of the Investment Management & Research Group of Wilshire Consulting.
Of the plans studied, 19.0 per cent had pension assets that equal or exceed liabilities as of fiscal year-end 2018, compared to 18.7 per cent at year-end 2017. At fiscal year-end 2007, five years into a recovery from the 2000-2002 bear market, 42 per cent of S&P 500 defined benefit plans were at a fully-funded or surplus status.
The aggregate pension expense for the S&P 500 Index companies in the study was USD20.7 billion for 2018, down from USD25.4 billion a year ago.
“The expected rate of return for pension assets has been declining over the past 20 years,” McGuire commented. “The median expected return was 9.50 per cent at the end of 2000 and fell to 6.75 per cent at the end of 2018.”
This is Wilshire’s nineteenth annual report on Corporate Pension Funding Levels, which presents the aggregate funded status of 268 defined benefit plans sponsored by S&P 500 Index companies. Wilshire’s practice is to collect data on U.S. pensions from 10-K filings for companies in the S&P 500 Index at fiscal year-end. All data for fiscal year 2018 is based on S&P 500 Index constituents as of year-end 2018 and, therefore, may differ slightly from the list of companies represented in earlier years.
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