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April 02, 2014 01:00 AM

Corporate pension plan funding ratio dips in first quarter — 2 reports

Rob Kozlowski
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    The funding ratio of typical U.S. corporate defined benefit pension plans fell in both March and the first quarter overall, according to reports from BNY Mellon Investment Management and Legal & General Investment Management America.

    The funded status for a typical plan decreased to 92.1% in March, down 50 basis points from the previous month, according to the BNY Mellon Institutional Scorecard

    The funding drop is the result of liabilities increasing 0.7%, while assets had relatively flat investment returns of 0.3% in the typical corporate DB plan.

    The uptick in liabilities comes as the Aa corporate discount rate fell two basis points to 4.56% in March.

    March was relatively uneventful from an asset class return perspective,” said Andrew Wozniak, director, portfolio management and portfolio strategy at BNY Mellon Investment Management, in a telephone interview. “Most of the asset classes we monitor recorded flat returns.”

    The drop in funding ratio brings the typical plan down a total of 3.1 percentage points from a high of 95.2% at the end of December.

    “In March, we saw the underperformance of 2013 market darlings (such as) biotech (and) Internet stocks,” Mr. Wozniak said, “and we’re asking ourselves, ‘Are investors losing their appetites for these?’”

    Mr. Wozniak said the firm is looking ahead to the second quarter, looking to perhaps a weather-related reversal and the possibility that inflation is around the corner.

    Also, according to the scorecard, the typical public defined benefit pension plan returned 0.1% in March, while the typical foundation and endowment returned -0.1%.

    According to LGIMA’s quarterly Pension Fiscal Fitness Monitor, the funding ratio of the typical U.S. corporate pension plan dropped in the first quarter to slightly less than 90% at the end of March from mid- to low 90% range as the result of plan discount rates falling 35 basis points overall.

    The 36 basis-point fall in Treasury rates caused most of that decline, according to the fitness monitor, causing liabilities to increase by nearly 6%.

    That drop outweighed the 1.2% return of global equity markets in the first quarter.

    “I think in my opinion it really comes down to (that) 2013 was a one-way ride for the most part in the movement of funding ratio and equity markets and rising rates,” said Jodan Ledford, head of U.S. solutions at LGIMA, in a telephone interview.

    “The first quarter kind of highlighted that interest-rate risk is large for plans that are not fully hedging their liabilities and can be the driver of where ratios go,” Mr. Ledford said. “There is somewhat of a sentiment that rates are going in one direction, but this shows there will be periods where you will have more volatility.”

    The monitor assumes an investment strategy of 60% global equity and 40% aggregate fixed income.

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