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October 03, 2014 01:00 AM

Corporate pension plans' funding ratios end Q3 on the decline — 3 reports

Rob Kozlowski
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    U.S. corporate pension plans experienced a decline in funding ratios by the end of September as a result of slowing growth in assets unable to keep up with liability values, three new reports show.

    Wilshire Consulting said the aggregate funding ratio for S&P 500 companies with defined benefit plans fell to 85% in September, down from 85.2% at the end of August, while reports from UBS Global Asset Management and Legal & General Investment Management America reported similar ratios in quarterly reports.

    The estimate by the institutional investment advisory and outsourced CIO business unit of Wilshire Associates came as a result of an estimated asset value decrease for the month of 2.7%, while liabilities dropped 2.5%.

    It is a different story from the first eight months of the year when funding ratios often dropped despite a gain in assets, which have been outpaced by liability increases. Overall, year-to-date through Sept. 30, the drop last month brings the total decrease in the aggregate funding ratio to 4.8 percentage points from the end of 2013, when the funding ratio was 89.8%.

    “(Year-to-date) I'd say it's been a surprise both from the asset and liability sides,” said Jeff Leonard, managing director at Wilshire Consulting. “Assets have done well, generally speaking, but the liabilities have increased in the face of declining interest rates so it's … a surprise on both sides, one good surprise and one bad surprise.”

    Wilshire's assumed asset allocation for its estimate of combined assets and liabilities is 33% domestic equity, 26% long-duration fixed income, 22% international equity, 17% core fixed income and 2% real estate.

    According to UBS Global Asset Management's quarterly pension fund fitness tracker, the funding ratio of the typical U.S. corporate defined benefit plan dropped by one percentage point to 89% in the third quarter.

    Robert Guzman, managing director and head of pension risk management at UBS Global Asset Management, said, “Not really a lot went on in the third quarter. The asset side of the equation was fairly quiet on the quarter. The real move for the quarter was the drop in rates.”

    The yield on the 10-year U.S. Treasury note dropped a little more than 50 basis points for the quarter.

    In another quarterly report, Legal & General Investment Management America said the average funding ratio of a typical U.S. corporate pension plan fell to the mid- to high-80s at the end of September, down from just less than 90% at the end of June.

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