The financial health of corporate pension plans, as indicated by the aggregate funding ratio of S&P 500 Index company pensions, declined slightly in fiscal 2016, according to Wilshire Consulting’s latest survey of 283 companies in the S&P 500 Index that maintain defined benefit plans.
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 declined by 0.5 per cent to 80.9 per cent at the end of fiscal 2016 from 81.4 per cent at the end of fiscal 2015, according to the 2017 Wilshire Consulting Report on Corporate Pension Funding Levels.
“Fiscal 2016 proved to be a volatile year for corporate defined benefit pension plans, despite ending the year with double digit positive returns for U.S. equities and positive returns for most asset classes,” stated Ned McGuire (pictured), Managing Director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “The defined benefit plans in our study yielded a median 7.6 per cent rate of return for fiscal year 2016. This is a reversal from the median -1.0 per cent rate of return for fiscal 2015.”
“Concurrently, interest rates used to value pension benefits declined during 2016 contributing to the overall increase in pension liabilities for the year. The median discount rate decreased by 23 basis points to 4.14 per cent from 4.37 per cent which accounts for part of the aggregate annual liability value increase of 3.1 per cent,” he added.
Of the plans studied, 89 per cent of corporate pension plans were underfunded as of fiscal year-end 2016, compared to 92 per cent underfunded plans as of fiscal year-end 2015. The median (50th percentile) corporate funding ratio for fiscal 2016 is 81.1 per cent, a slight increase from the median funding ratio of 81.0 per cent for the previous fiscal year.
“The aggregate pension expense for the S&P 500 Index companies in our study was USD30.0 billion for 2016, down from USD36.0 billion a year ago,” McGuire commented. “Total annual pension expense accruals from employee service and interest expense declined by USD 5.9 billion to USD 88.7 billion in 2016 from USD 94.6 billion a year ago. Simultaneously, the S&P 500 Index companies in our study contributed USD 41.3 billion into their defined benefit plans in 2016, a significant increase from the USD 29.9 billion contributed in 2015.”
Aggregate benefit payments from the S&P 500 corporate pension plans in our study increased 2.8 per cent year-over-year. These plans’ benefit payments totalled USD 92.2 billion in 2016, compared to USD 89.7 billion during the previous year.
“The distribution of pension liabilities and assets of S&P 500 Index companies is relatively concentrated among the largest plans,” McGuire stated. “As of the end of fiscal year 2016, approximately half of the total pension assets and liabilities were held by the 25 largest plans when ranked by both asset and liability size. Conversely, the smallest 100 plans when ranked by asset and liability size made up just over 3 per cent of the total asset and liability pools.”
This is the seventeenth annual corporate funding report issued by Wilshire Consulting, the institutional investment advisory and outsourced-CIO business unit of Wilshire Associates Incorporated (Wilshire®), a diversified global financial services firm. Wilshire Consulting assists in ensuring secure and safe retirements for approximately 49 million Americans including those participating in some of the nation’s largest corporate and public retirement plans.
To prepare the report, Wilshire Consulting collects data on US pensions from 10-K filings for companies in the S&P 500 Index at fiscal year-end. All data for fiscal year 2016 is based on S&P 500 Index constituents as of year-end 2016 and, therefore, may differ slightly from the list of companies represented in earlier years.