Surging investment returns outpaced slow-growing liabilities in May, bringing the funded status of the 100 largest U.S. corporate defined benefit pension funds to 109.6%—the highest ratio recorded since the 109.9% mark observed in July 2001—according to Milliman’s Pension Funding Index.

Thanks to last month’s robust 2.22% investment return, more than quadruple Milliman’s expected rate of 0.53%, the market value of Milliman 100 plan assets grew $22 billion during May. The projected pension liability for Milliman 100 plans increased by $4 billion over the month, resulting from a decrease of 4 basis points in the monthly discount rate.

The funded status improved by $18 billion in May, compared with $23 billion in April, when discount rates rose 1 bps. But May’s funded ratio record told the bigger story, says Zorast Wadia, the author of Milliman’s PFI and a principal at the firm.

“Interest rates continue to be resiliently high, and market returns are strong,” Wadia says. “[It] is an optimistic time for plan sponsors.”

Improvements Across the Board

Mercer’s analysis found the funding levels of pension funds sponsored by companies in the S&P 1500 increased by 2 percentage points in May to 110%, stemming from an increase in equity markets partially offset by a decrease in discount rates.

MetLife estimated that the average U.S. corporate pension funded status rose to 107.2% last month, up 0.5 percentage points from 106.7% in April—driven primarily by allocations to equities and bonds.

Aon, which tracked the daily funded status of pension funds of S&P 500 companies, estimated the funding ratio increased to 106.4% in May from 103.2% in April. Pension asset valuations increased by 1.8 percentage points during the month, driven largely by a 5.1-percentage-point increase in U.S. equities, per the Russell 3000 Index. During the month, discount rates decreased by 6 bps, partially offsetting the positive effect of investment returns on funded status.

In its monthly review, L&G Asset Management, America estimated that the funding ratio rose to 110.3% in May from 108.5% in April. Discount rates edged down 1 basis point over the month, as a 4-bps Treasury component rise was offset by 5-bps-tighter spreads in credit investments.

Gallagher found discount rates decreased slightly during May to end the month at 5.73%, down 0.06 percentage points from the end of April.

Wilshire’s pension finance monitor estimated that the aggregate corporate pension funding ratio increased by 1.7 percentage points in May, ending the month at 108.9%.

Both model plans tracked by October Three Consulting gained ground in April. Plan A, a traditional 60/40 equity/bond allocation, improved slightly more than 2 percentage points last month, while the more conservative Plan B, comprised of 80% bonds, moved up 1 percentage point.

Interest Rate Outlook

Corporate bond yields fell just a few bps in May, and pension liabilities increased by less than 1%, October Three reported in its pension finance update. Brian Donohue, a partner in the firm, says that while the prospect of lower interest rates is always a concern for plan sponsors, it would take a more significant drop than that seen in May to create a “real problem.”

From 1982 to 2020, almost continuously, pension sponsors were “trying to navigate against the headwind” of lower interest rates, Donohue says. But since the end of 2020, interest rates have crept up.

“I think it’s worth asking the question, ‘What if rates go down 50 bps or 100 bps?’” Donohue says. “We just haven’t seen that sort of move since we saw rates turn around and start going higher in 2021. That’s something we keep our eye on.”

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