Defined benefit plan funding levels are expected to be stable in the third quarter despite the current financial crisis, while defined contribution plan participants seem to be staying the course.
Defined benefit assets have decreased because of the stock market's dive, but liabilities also are down because of higher corporate bond yields. That combination is the main reason pension plans' funded status should weather the storm, according to executives at Mercer LLC, BNY Mellon and Watson Wyatt Worldwide.
“I'm not sure we'll see a huge swing in pension funding ratios,” said Peter Austin, executive director at BNY Mellon Pension Services Group in New York. “But in the longer term there will be more pressure on pension plan funding as corporate bond spreads will tighten as a result of more flight to corporates.”
Mr. Austin said pension funds were 96.3% funded at the end of June. On Sept. 23, he estimated they were 95.6% funded.
When corporate bond spreads reverse their widening trend and tighten, the present value of pension fund liabilities will increase, he said. But if equity markets stabilize and return to their normal historical pattern of positive returns, pension plans' funding levels could drop to 91% later this year, Mr. Austin said.
Mark Ruloff, head of asset allocation strategies at Watson Wyatt in Arlington, Va., projected pension plans would be 84% funded as of Sept. 24, down from 91% in the second quarter. The drop will come from declines in pension fund assets, he said, noting liabilities “haven't moved that much.”
Adrian Hartshorn, principal at Mercer in New York, estimated pension funds could be 99% funded — with a deficit of $20 billion — by the end of this quarter, vs. 97% funded and a deficit of $50 billion at the end of June.
“These third-quarter pension funding numbers are interesting,” Mr. Hartshorn said. “Over the quarter, we expect pension plans to be in a slightly better position than end of June. The main reason is the reduction of the equity component's value has been offset by the falling value of liabilities, which are linked to higher corporate bond spreads.”