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Pension Funds

U.S. corporate pension funding ratios surge to 4-year high in January – 3 reports

U.S. corporate pension funding ratios rose to an average of 88% in January, according to reports by Mercer, Legal & General Investment Management America and Wilshire Consulting.

The aggregate funded status of defined benefit plans sponsored by S&P 1500 companies increased by 3 percentage points in January to 87% as of Jan. 31, a monthly report by Mercer said.

This increase was due to both an uptick in discount rates and positive equity markets.

The estimated aggregate deficit was $291 billion as of Jan. 31, compared to $375 billion as of Dec. 31, according to Mercer.

The S&P 500 index gained 5.6% and the MSCI EAFE index gained 5% in January. Typical discount rates for pension plans as measured by the Mercer yield curve increased by 18 basis points to 3.74%.

"The volatile markets of early 2018 underscore just how important risk management is for pension plans," said Matt McDaniel, a partner in Mercer's U.S. wealth business, in a news release. "January was a great month, driving funded status to a four-year high, and plan sponsors with timely execution on dynamic derisking strategies were able to lock these gains in before the market decline in early February.

Mr. McDaniel added: "Sponsors whose governance model doesn't support systematic derisking in real time saw these gains evaporate in days and may continue to realize funded status volatility."

In another monthly report, LGIMA found that the pension funding ratio of a typical corporate pension plan increased over January, primarily driven by gains in the equity market and an increase in the discount rate to 3.86%. LGIMA estimates that the typical plan's funding ratio increased 4.4 percentage points during the month to 88.6% as of Jan. 31.

LGIMA estimates that Treasury rates increased by 23 basis points, while credit spreads tightened 5 basis points, resulting in the discount rate rising 18 basis points.

Liabilities for the typical plan were down 2.19%, while plan assets with a traditional 60/40 asset allocation increased by 2.94%, LGIMA said.

Meanwhile, according to Wilshire, the aggregate funding ratio for S&P 500 companies with corporate pension plans rose nearly 4 percentage points over the month to 88.4%.

Asset values increased 2% over the month, while liabilities decreased 2.2%, Wilshire said. In the past 12 months through Jan. 31, the aggregate funding ratio is up 6.4 percentage points.

"January's month-end funded ratio is the highest in over four years since December 2013 when the funded ratio was 88.9%," said Ned McGuire, managing director and a member of the pension risk solutions group of Wilshire Consulting, in a news release. "January's increase in funding was driven by a decline in liability values caused by the significant rise in Treasury yields and an increase in asset values fueled by strong performance in global equities."