Funding ratios of U.S. corporate defined benefit plans fell further in the first quarter of 2015, three new reports state, as liabilities rose faster than assets.
The BNY Mellon Institutional Scorecard found the funding ratio of a typical corporate defined benefit plan fell 10 basis points in the quarter.
For the three months ended March 31, liabilities rose 2.79%, the result of a 14-basis-point drop in the discount rate to 3.86%, according to BNY Mellon. During the same period, assets rose 2.61% from positive performance in most asset classes, said Andrew D. Wozniak, director and senior investment strategist in the investment strategy and solutions group within BNY Mellon Investment Management.
International equities, U.S. small-cap equities and long Treasuries had the strongest returns for the quarter at 4.9%, 4.3% and 3.96%, respectively. In fact, a higher allocation to long Treasuries helped corporate plans outperform public DB plans, and endowments and foundations, which retuned 2.24% and 1.72%, respectively, for the quarter, Mr. Wozniak said in a telephone interview.
Separately, Legal & General Investment Management America found the funding ratio of a typical DB plan declined 140 basis points to 81.7% in the first quarter.
Liabilities rose 3.8 percentage points, the result of a 19-basis-point drop in the discount rate to 3.8% that outweighed a 2.2 percentage-point increase in assets, said LGIMA's quarterly Pension Fiscal Fitness Monitor.
“We continue to see significant interest in equity replication strategies from corporate pension plans, as plan sponsors seek to utilize capital most efficiently to control funded status outcomes. In particular, option-based strategies optimized for the current market environment have been popular with our clients,” said Donald Andrews, head of LDI strategy at LGIMA, in a news release.
The LGIMA Pension Fiscal Fitness Monitor assumes an investment strategy of 60% global equity and 40% aggregate fixed income.
And Aon Hewitt found the aggregate funded status of S&P 500 companies with defined benefit plans fell 120 basis points to 82% in the first quarter as liability growth outpaced assets.
For the three months ended March 31, liabilities increased about 2.1% to $2.13 trillion, the result of an 18-basis-point drop in the discount rate, the Aon Hewitt Pension Risk Tracker said. During the same period, assets rose by about 0.63% to $1.75 trillion, the result of positive investment returns of 2.27%.
Aon Hewitt estimates daily the funding ratio of the 361 S&P 500 companies with DB plans.
In March, the aggregate funding ratio fell 83 basis points.
“Falling interest rates continue to drive liabilities higher, outpacing pension asset growth. As a result, we anticipate continued settlement activity throughout 2015,” said Ari Jacobs, global retirement solutions leader at Aon Hewitt, in a news release. “Additionally, in-year declines in interest rates may contribute to the attractiveness of lump-sum programs, which often base lump-sum rates on interest levels from the end of the previous year, resulting in potential accounting gains for plan sponsors.”
