The funding ratios for U.S. corporate plans dipped in April, according to recent reports from Wilshire Consulting, BNY Mellon Investment Management, Milliman and Mercer. All four cited rising liabilities and modest asset returns as the reasons for the drops, which ranged from 0.6 to 1.1 percentage points.
Milliman's 100 Pension Funding Index found the funding ratio dropped to 84.7% from 85.3% the previous month, while the monthly discount rate decreased 10 basis points to 4.2% from 4.3%.
Assets rose $6 billion to $1.427 trillion from $1.421 trillion at the end of March, while the projected benefit obligation went up $21 billion to 1.685 trillion. The asset return for the month was 0.75%.
“We keep slipping further and further away from full funding,” said John Ehrhardt, principal, consulting actuary and co-author of the report, in a news release. “The historic improvement of 2013 has been countered by a $72 billion decrease in funded status so far in 2014, with falling interest rates driving much of the change.”
If the pension funds achieve a median 7.4% expected rate of return and the discount rate remains at the current 4.2%, the funding ratio would improve by year-end to 86.5%.
Wilshire Consulting's April report found the ratio for the typical U.S. corporate pension plan decreased 0.8 percentage point in April to 86%.
Since Jan. 1, the funding ratio has decreased 3.9 percentage points to 86% from 89.9%, Wilshire said.
Asset values increased 0.8% this month with international equity and long-duration fixed income performing especially well, said Jeff Leonard, managing director at Wilshire Associates and head of the actuarial services group of Wilshire Consulting.
“These numbers (assets and liabilities) tend to bounce around a little bit, but year-to-date liabilities have crept up every month,” Mr. Leonard said in a telephone interview. “The concern from a plan sponsor's perspective is that liabilities have increased as rates have gone down.”
The typical pension fund, as studied by Wilshire, has an asset allocation of 33% domestic equity, 26% long-duration fixed income, 22% international equity, 17% core fixed income and 2% real estate. Wilshire uses data of S&P 500 company pension funds derived from corporate filings to create the model plan.
The funding ratio of S&P 1500 companies with defined benefit pension plans fell one percentage point to 84% in April, according to a monthly report from Mercer.
There has been a movement among plan executives to adopt liability-driven investment strategies, said Jim Ritchie, principal in Mercer's retirement business, in a telephone interview. However, “some plan sponsors are hesitant to go to full hedging liability strategies.”
Additionally, although some plan executives expect interest rates to rise over the next few years, “it might still be to their benefit to move to more LDI strategies,” Mr. Ritchie said.
Estimated aggregate assets as of April 30 totaled $1.84 trillion, up from $1.83 trillion at the end of March and down from $1.85 trillion as of Dec. 31. Estimated projected benefit obligations totaled $2.2 trillion, up from $2.16 trillion as of March 31 and up from $1.96 trillion at the end of December.
According to the BNY Mellon Institutional Scorecard, the funded status for a typical corporate DB plan decreased to 91% in April, down 1.1 percentage points from the previous month, according to the BNY Mellon Institutional Scorecard.
The rise in liabilities is the result of the discount rate falling 13 basis points to 4.43% in April.
The drop in funded status brings the typical corporate DB plan down a total of 4.2 percentage points from a high of 95.2% at the end of December.
“From an assets-only perspective, corporate defined benefit plans edged out endowment investors in April,” said Andrew Wozniak, director, portfolio management and portfolio strategy at BNY Mellon Investment Management, in a telephone interview.
The typical endowment and foundation returned 0.4% on its assets in April, missing the monthly target of inflation plus 5% spending Mr. Wozniak said. This underperformance was primarily due to a 2.3% decline in private equity.
However, Mr. Wozniak noted that public defined benefit plans had a “favorable” month, meeting their monthly return target of 0.6%. n
