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Pension Funds

U.S. corporate pension funding drops in Q4 on market losses – 2 reports

The funding ratios for U.S. corporate plans fell over the fourth quarter of 2018 due to market losses, two reports estimate.

According to Legal & General Investment Management America's quarterly Pension Fiscal Fitness Monitor, the funding ratio of a typical U.S. corporate pension plan declined to 84.4% from 91.5% during the three months ended Dec. 31.

Liabilities for the average plan rose 0.74% in the three months, while plans with a traditional 60% global equity and 40% aggregate fixed-income asset allocation saw their assets decrease 7.05%, resulting in a 7.1% decrease in funding ratios.

Global equity markets decreased by 12.65% and the S&P 500 fell 13.52%. Plan discount rates increased by three basis points, as Treasury rates decreased 23 basis points and credit spreads widened 26 basis points.

"We estimate that funded ratio levels for the typical plan with a traditional asset allocation decreased over the fourth quarter, largely due to negative equity performance," said Ciaran Carr, senior solutions strategist at LGIMA, in a news release. "We continue to see an uptick in demand for more customized strategies to help hedge interest rate risk and mitigate funded ratio risks. Completion management, multiasset hedging and tail-risk strategies remain in high demand as plans hope to reduce downside risk and invest in more diverse asset classes."

Meanwhile, money manager Barrow, Hanley, Mewhinney & Strauss estimates the average U.S. corporate pension plan funding ratio fell to 84.2% as of Dec. 31 from 90.5% three months earlier. Barrow Hanley's report cited asset losses and increased liabilities for the drop in the funding ratio.

The estimate was calculated using the most recent 10-K filings from Russell 3000 companies and estimated the funding ratios using the following asset allocation with asset classes' associated indexes: 29% long-duration fixed income, 28% domestic equities, 15% international equities, 10% core fixed income, 6% hedge funds, 5% private equity, 3% each cash and commodities, and the rest in real estate investment trusts.

By industry, Barrow Hanley said the average funding ratio as of Dec. 31 was highest among financial companies at 93.3% and lowest among communication services firms at 76.3%.