Reports from BNY Mellon Asset Management and Mercer show the funded status of corporate defined benefit plans continued to improve in February, boosted by strong equity returns while discount rates remained low.
BNY Mellon Asset Management reported the typical U.S. corporate pension plan’s funding ratio increased to 76.2% last month, from 74.1% in January, while Mercer found that S&P 1500 companies’ defined benefit plans had an aggregate funding ratio of 79% in February, up from 78% in January.
U.S. equities returned more than 4% in February. The typical discount rate increased three basis points to 4.33, according to BNY Mellon, while Mercer reports rates on high-quality corporate pension plans dropped seven basis points.
It was the fifth straight month equities have posted a positive return. Rallying markets also have helped assets increase 6.2% for the first two months of the year, while liabilities have grown at 0.9% for the typical defined benefit plan, according to BNY Mellon. But Jeffrey B. Saef, managing director at BNY Mellon Asset Management and head of its investment strategy and solutions group, said pension plan executives remain “wary” about a turnaround.
“I don’t want to get overconfident with what equity markets have shown over the first eight weeks,” Mr. Saef said in a telephone interview. “I do not think the positive turn in equity markets will change (plan sponsors’ wanting) to reduce funding status risk."
Mr. Saef said the beginning of 2012 has reminded him of the first quarter of 2011 when equities started strong before reversing course. The difference this time around, he said, is that the European debt crisis has more clarity now, with the risk premium going down for investors.
With interest rates expected to remain low through 2014, corporate pension plans are expected to increase contributions by 30% to 40% this year from $50 billion in 2011, according to Mercer’s report. Discretionary contributions to pension funds also have been increasing in the last few months to further help fund plans and should continue in 2012, said Jonathan Barry, partner with Mercer’s retirement risk and finance consulting group.
“One thing that’s very interesting is we saw similar improved funding status in the first few months of 2011 and that all crashed away,” Mr. Barry said in a telephone interview. More plan sponsors have discussed strategies to reduce risk in the past year, and some plans are now executing risk strategies as funding levels improve, he said.
The estimated aggregate value of pension plan assets of the S&P 1500 companies as of Feb. 29 was $1.54 trillion, up from $1.5 trillion as of Jan. 31. Liabilities increased to $1.95 trillion from $1.93 trillion during the same time period.