July was another positive month for corporate pension funding, but the story behind it differed from other months of positive performance this year.
MetLife Investment Management, the institutional asset management business of MetLife Inc., estimated that the average U.S. corporate pension funded status rose to a decade high of 108.5% in July, up from 105.7% in June.
In January, April and May this year, funded status improvements were driven primarily by investment returns, according to Jeff Passmore, MIM’s strategist for liability-driven-investing solutions. In July, however, higher interest rates and wider credit spreads caused losses in the bond holdings of pension plans, but the impact was “more than offset” by the gains the same two factors drove on the liability side of the balance sheet, Passmore says.
Discount rates began the month at 5.34% and rose to a high of 5.75% at month-end, MIM reported in its monthly update. Ten-year Treasury yields rose by 24 basis points, AA-rated long corporate bond spreads widened by 8 bps, and other discount curve rates increased by 9 bps.
Gallagher found discount rates rose sharply during July, ending the month at 6.14%, up 0.44 bps from the end of June. Following three straight months of changes of less than 0.06 bps, July’s bump marked the largest monthly increase since April 2024, when rates also increased by 0.44 bps.
The funded status of the 100 largest U.S. corporate defined benefit plans “swelled” to 112.1% in July—a 25-year high—due to a 41-bps discount rate increase, according to Milliman Inc.’s Pension Funding Index. Discount rates rose to 6.02% in July from 5.61% in June, reducing plan liabilities by $52 billion, a much bigger drop than the $27 billion in plan assets lost in worse-than-expected market returns.
Mercer reported that the funding levels of pension plans sponsored by companies in the S&P 1500 increased by 2 percentage points in July to 111%, stemming from an increase in discount rates offset by a decrease in equity markets.
Aon PLC, which tracks the daily funded status of pension plans of S&P 500 companies, estimated the funding ratio rose to 108% in July, up 1.5 percentage points from June.
Wilshire’s pension finance monitor estimated that the aggregate corporate pension funding ratio increased by 2.3 percentage points in July, ending the month at 111%.
In its monthly review, L&G Asset Management, America estimated that pension funding ratios remained roughly unchanged in July at 110%. Equity performance was relatively flat over the month, with global equities increasing by 0.1 percentage points and the S&P 500 down 0.1 percentage points. Plan discount rates were projected to have increased 27 bps due to a 25-bps rise in the Treasury component and a 2-bps widening in the credit component.
Both model plans tracked by October Three Consulting gained ground in June. Plan A, a traditional 60/40 equity/bond allocation portfolio, increased more than 1 percentage point last month, while the more conservative Plan B, comprised of 80% bonds, gained a fraction of 1 percentage point. Plan A is up 9 percentage points for the year, and Plan B remains up 2 percentage points through the first seven months of 2026.
Muted Relief Ahead
While higher interest rates should typically serve plans well, plans seeking funding relief may soon be disadvantaged by them, according to October Three’s update. Market interest rates have largely exceeded both the interest rate floors and ceilings that calendar-year plan sponsors are required to use for IRS funding purposes for 2026 and are anticipated to beat out estimates for 2027.
Brian Donohue, a partner in October Three, explains that at current rates, funding relief could force sponsors to exaggerate liabilities by 5% or more in 2027 and beyond, increasing required contributions and forcing some seemingly overfunded plans to make additional contributions.
“Looking overfunded becomes [looking] underfunded when liabilities are inflated,” Donohue says. “No one expected the [ceiling] rates were going to interfere with the rates plans were using. Now, funding relief looks punitive.”
Tags: corporate pensions