US Pensions to Gorge on Corporate Bonds as Funding Levels Soar

A quirk in retirement fund accounting is making corporate pensions look particularly flush now, giving them more incentive to cut risk by dumping equities and buying bonds.

Corporate bond yields, used to value companies’ pension payouts, have jumped since early last year, effectively allowing fewer dollars now to fund future obligations. That oddity in pension accounting has helped leave retirement plans with 104.2% of the funding they need as of the end of October, data from the Milliman 100 Pension Funding Index shows.

That’s the greatest level of overfunding since October 2022 according to the index, which looks at aggregate funding ratios for the 100 biggest corporate pensions. Funding levels have been climbing for more than a decade, helped by a surging stock market.

The surplus could further boost bond buying, according to JPMorgan Chase & Co. Fully funded pensions often sell equities and buy bonds, particularly corporate notes, to lock in higher yields that can cover future obligations.

“Pension plans are taking advantage of the highest yields in many, many years, which is logical and what they should do and they’re doing it,” said Eric Beinstein, JPMorgan’s head of US high grade credit research and strategy, in an interview. “Not only does the fixed-income yield look attractive, but equity volatility is also a lot higher now. So, you’re not incentivized to hang on another year, thinking maybe stocks will be up.”

pension funding levels

Since March 2022, the 100 US public companies sponsoring the largest plans have enjoyed surplus or near-surplus funding levels overall, Milliman’s analysis through October 31 shows. Retirement plans were underfunded for much of the decade or so following the 2008 financial crisis, but that trend reversed after the central bank started raising rates.