Dwindling interest rates are making life tougher for corporate defined benefit pension plans, despite the persistent stock bull market. The result, according to a study by Goldman Sachs Asset Management, will be a reduced funding status for corporate DB plans.
By Goldman’s estimate, funded status for S&P 500 companies’ plans—which gauges how much of their obligations their assets can deliver—will drop to 86% in August, from 88% the month before. As recently as April, it sat at 91%.
The tumble in interest rates was due in large part to the Federal Reserve’s quarter-point lowering of its benchmark rate in July. The central bank’s policymaking body is expected to decrease that rate another quarter percentage point on Wednesday.
As a result, look for a paring of the discount rate, which pension funds use to measure expected returns on their assets. In general, the lower the discount rate, the harder it is to deliver on obligations to beneficiaries. Goldman estimates that the average discount today will be 3.2%, down from 4.2% in 2018.
The expected decline in funded status, the Goldman report finds, “has occurred despite significant asset appreciation,” noting the S&P 500’s sturdy advance this year, up more than 20%.
Trouble is, corporate DB plans are more dependent these days on fixed income than on equities. Conning research indicates that fixed income made up 43% of plan assets in 2018, compared to 30% for stocks. In 2014, the two asset classes were even, with 39% each. (The balance was taken up by alternatives.)
It’s unlikely that plans’ funded status will rebound anytime soon. President Donald Trump continues to put pressure on the Fed to keep interest rates low and many analysts are forecasting two to three additional rate cuts through 2020. That will make it difficult for pension plans to get bigger payouts from bonds and their ilk any time soon.