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U.S. S&P 500 Pension Plans See Funded Status Deficit Increase $48 Billion in Q2
Aon Hewitt analysis finds low interest rates continue to increase pension liabilities


LINCOLNSHIRE, Ill. (July 8, 2016) – According to an analysis from Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE:AON), the funded status deficit of U.S. pension plans increased by $48 billion in the second quarter of 2016 due primarily to continued declines in interest rates. When combined with the $81 billion deficit increase in the first quarter, the funded status deficit has increased by $128 billion year to date.  

Data from the Aon Hewitt Pension Risk Tracker, which evaluates daily funded status for S&P 500 companies with defined benefit pension plans, shows the aggregate funded ratio decreased from 78.2 percent to 76.7 percent in the second quarter. The funding deficit was largely driven by a liability increase of $74 billion, which was offset by asset gains of $26 billion.

“While the United Kingdom’s vote to leave the European Union capped off a volatile first half of 2016, the low interest rate environment continued to drive an increase in pension liabilities,” said Ari Jacobs, Global Retirement Solutions leader at Aon Hewitt. “Continued volatility and expectations that central banks will keep rates low for a longer period highlight the ongoing challenges facing pension plan sponsors and underscore the need for a holistic de-risking strategy.”

Second Quarter Findings:

  • Pension liabilities increased by 3.5 percent. Ten-year Treasury rates were down by 29 basis points over the quarter and credit spreads narrowed by 1 basis point, resulting in a 30 basis point decrease in the discount rate over the quarter for an average pension plan.
  • Return-seeking assets were strong throughout the quarter:
    • The Russell 3000 Index returning 2.6 percent
    • Equities were outperformed by bonds during the quarter, with the Barclay’s Long Gov/Credit Index returning 6.5 percent
    • Overall pension assets returned 2.8 percent over the quarter

June Findings:

In June, the S&P 500 aggregate pension funded status decreased from 78.0 percent to 76.7 percent.

  • For the month of June, pension asset returns were strong, ending the month with a 1.40 percent return.
  • The month-end 10-yr Treasury rate decreased 35 basis points compared to the May month-end rate. Credit spreads widened by 12 basis points. This combination resulted in a decrease in the interest rates used to value pension liabilities from 3.76 percent to 3.53 percent over the month. According to the Aon Hewitt Pension Risk Tracker this is the lowest month-end rate since January 2015.


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