Milliman, UBS reports show corporate DB funding climb

The funded status of U.S. corporate defined benefit plans rose in March, according to two separate reports released Thursday, as discount rates increased and investment returns remained positive.

The funding ratio of the 100 largest corporate pension plans increased to 85.1% at the end of March, up from 82% at the end of February, according to the Milliman 100 Pension Funding Index. The funded status improvement, to 85.1% from 78.7%, was the largest first-quarter increase in the 12-year history of the report and the third best quarter overall.

UBS Global Asset Management's quarterly U.S. Pension Fund Fitness Tracker showed a similar improvement for a typical U.S. corporate DB plan, as the funding ratio increased to 83% from 78% in the first quarter. Most asset classes, led by equity markets, performed strongly, leading to 6.3% returns for a typical plan's asset pool despite credit bonds remaining relatively flat and government bonds being negative for the quarter.

A strong first quarter for funding ratios provides an opportunity for derisking, said Francois Pellerin, head of asset liability investment solutions-Americas at UBS Global Asset Management. Plan sponsors are adding hedging protection and lowering equity exposure as funding ratios exceed the 80% threshold, Mr. Pellerin said. They are also more prepared for a market correction than the years leading into the financial crisis, he added.

“More plans have more to lose if there's a market correction than more to win if the rally continues,” Mr. Pellerin said in a telephone interview, referencing 2011 when a similarly strong first quarter was wiped out over the summer. “We realize the returns may not last forever, and now is an opportunity to take protective measures to make them more lasting.”

While continued market rallies over the last six months helped improve the funded status of plans, an increase in the discount rate has tempered an increase in liabilities, which ballooned in the latter half of 2011. The discount rate increased 19 basis points to 4.88% in March, resulting in a $54 billion decrease in liabilities for the top 100 corporate plans, according to Milliman. The overall pension deficit decreased 20% to $227 billion at the end of March.

UBS reports the discount rate increased only one to five basis points for the quarter and liabilities increased by less than 1%.

The asset value of the 100 pension plans Milliman studies remained fairly stable at $1.3 trillion, while the overall projected benefit obligation decreased to $1.53 trillion from $1.58 trillion at the end of February.

UBS approximates the return for a typical plan using the reported asset allocation of its Pension 500 Database.