The funded status of S&P 1500 companies' pension funds fell slightly in February, primarily due to newly available year-end financial reports, according to a report from Mercer.
The estimated aggregate funding ratio of 87% at the end of February is a drop of two percentage points from the end of January. Mercer primarily attributes the lower ratio to year-end financial statements that were released in February. Estimates are based on the year-end statements, along with projections to Feb. 28 in line with benchmark indexes.
The adjustment based on the release of those statements is due to a higher allocation to fixed income than previously estimated, and also that many companies adopted more conservative assumptions regarding participants' longevity, increasing total liabilities, the report said.
The drop in funded status due to the adjusted estimates comes even as equity markets posted returns in excess of 4% in February.
Jonathan Barry, partner in Mercer's retirement risk and finance group, said in a counterintuitive way, it's a good thing that the funded status went down in February.
“A few sponsors have moved to a higher fixed-income allocation, which means they returned less. Fixed income didn't do as well last year,” Mr. Barry said.
However, the higher allocation to fixed income means pension fund executives are better hedging their liabilities for the long run, Mr. Barry said.
“Maybe they missed out on the equity returns (in 2013), but it showed a further move to derisking,” Mr. Barry said.
Mr. Barry said about half of the 10-K filings from the approximately 600 S&P 1500 companies that have a traditional defined benefit pension fund are in, and a further adjustment to the estimates should be expected for March.
Estimated aggregate pension fund assets as of Feb. 28 totaled $1.86 trillion, compared with estimated aggregate projected benefit obligations totaling $2.13 trillion.