The funded status of U.S. corporate defined benefit pension plans improved in February, primarily due to rebounding equity markets, according to two new reports from Aon Hewitt and BNY Mellon Investment Management.
According to the BNY Mellon Institutional Scorecard, the typical corporate defined benefit pension plan's funding ratio increased to 92.6% at the end of February, up from 91% at the end of January.
A rebounding equity market contributed to the improved ratio, overcoming a decrease of eight basis points in the discount rate to 4.58% in February.
Despite the February gains, the ratio is still down 2.6 percentage points from its year-end high of 95.2%, due to a particularly poor January on both the asset and liability sides.
Andrew Wozniak, director, portfolio management and investment strategy, at BNY Mellon, said the long-term outlook is positive.
“The big picture is promising,” Mr. Wozniak said in a telephone interview. “This is the sixth consecutive month north of 90%, which I think is a milestone, and you know from the market perspective, the S&P 500 reached an all-time high (in February).”
The markets are performing strongly, there's global growth and from a historical perspective, the cost of debt is meager, Mr. Wozniak said.
However, “the greatest risk is what we call geopolitical risk, with Eastern Europe and Eastern Asia,” Mr. Wozniak said, citing the crisis in Ukraine along with events in China and Japan. “From a tail-risk perspective we're monitoring the geopolitical risk closely.”
In looking at returns for February, the typical public defined benefit plan and the typical foundation and endowment outperformed the typical corporate defined benefit plan, 3.5% each to 3.3% for the typical corporate DB plan.
Mr. Wozniak said the better performance was due to the greater allocations to growth-oriented assets for public plans, foundations and endowments, compared to the higher fixed-income allocations for corporate plans that are winding down.
According to the Aon Hewitt Pension Risk Tracker, the aggregate funding ratio of the 359 S&P 500 companies with DB plans improved to 89.1% at the end of February from 88% the previous month.
Equity returns for the companies improved to 3.18% for February, while discount rates fell to 4.54% from 4.67% for the month. Aon Hewitt attributed the drop in the rate to 10-year Treasury rates falling by one basis point and credit spreads narrowing by 12 basis points.