DB Financing Cools in July, but Still Up for 2021

Private-sector pension plan finances lost ground in July, say recent reports; nonetheless, the news for 2021 overall remains good. 

Cool in July

October Three, which tracks two hypothetical defined benefit plans—one that is invested in a more traditional way and another invested in a conservative manner—reports that in July, pension finances slipped slightly. And consulting firm NEPC, which tracks a hypothetical total return plan and a hypothetical liability-driven investment (LDI) plan, says that in July corporate pension plans “probably experienced modest losses in funded status.”

October Three says that the finances of the plan it tracks that is invested more traditionally dropped 1% in June, and those of the more conservatively run plan also fell, but only by a fraction of 1%. For its part, NEPC says that the funded status of the total-return plan fell 1.8%, while that of the LDI-focused plan declined 0.1%.

Both assets and liabilities of both of the plans October Three tracks grew in July, and assets for both were higher than liabilities. This is a continuation of a trend that started in April.

October Three attributes the July performance to lower interest rates; NEPC says the performances it found were the result of a decline in Treasury rates and a slight widening of credit spreads. They add that equity performance was largely overshadowed by fixed income, which they say likely lead to the greater decline for total-return plans. NEPC says that hedging liabilities limited the LDI-focused plan’s decline. 

But Progress Overall

Despite the July results, October Three says that so far for 2021, both plans are faring well. The finances of the plans may have dropped slightly in July, but they both are up for the year so far. The finances of the traditional plan are up by 9% overall, and those of the more conservatively run plan are up by more than 2% for 2021 overall. 

Put another way, the actuarial firm says that both plans have funded ratios above 100%: The traditional plan is just below 110%, and the conservative plan is around 102%.