Strong equity market gains outpacing increasing liabilities in the quarter
The average U.S. corporate pension plan funding ratio rose during the first quarter thanks to market gains, two reports estimate.
The gain was mostly the result of a strong first two months of the year, as two other monthly reports show funding ratios declining in March as liabilities outpaced asset growth.
Legal & General Investment Management America's Pension Fiscal Fitness Monitor estimates the average U.S. corporate pension plan funding ratio as of March 31 was 85.6%, up from 84.4% three months earlier. LGIMA's report cited the S&P 500's 13.65% gain during the quarter and global equity markets' gain of 12.33% during the quarter as the main driver.
Plan discount rates decreased by 42 basis points, as Treasury rates decreased 23 basis points and credit spreads tightened 19 basis points, resulting in a 7.04% increase in plan liabilities. Plan assets with a traditional 60% equity/40% bond asset allocation on average rose 8.54%, resulting in a 1.18 percentage point increase in funding ratios over the first quarter.
"We estimate that funding ratio levels for the typical plan with a traditional asset allocation increased over the first quarter, largely due to assets outperforming liabilities," said Ciaran Carr, senior solutions strategist at LGIMA, in a news release. "Many clients continue to focus on hedging interest rate and credit spread risk inherent in plan liabilities. Doing so can help reduce funded status volatility, which is a key metric of risk for many defined benefit pension plans."
Mr. Carr added: "As clients continue to move along their glidepath, completion management and other custom hedging strategies have increased in popularity across the industry. Tailoring the fixed income more toward the plan's liabilities has helped develop an outcome-orientated approach to their investment strategy while helping support potential end-game objectives, such as pension risk transfers or self-sufficiency."
Meanwhile, money manager Barrow, Hanley, Mewhinney & Strauss estimates the average U.S. corporate pension plan funding ratio rose to 89.2% as of March 31 from 84.2% three months earlier. Barrow Hanley's report cited asset gains for the increase in the funding ratio.
The estimate was calculated using the most recent 10-K filings from Russell 3000 companies and estimating 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 2% real estate investment trusts.
By industry, Barrow Hanley said the average funding ratio as of March 31 was highest among financial companies at 102.4% and lowest among communication services at 80.8%.
In addition, the average U.S. corporate plan funding ratio dropped in March, according to reports by Wilshire Consulting and Northern Trust Asset Management.
The estimated aggregate funding ratio for U.S. corporate pension plans sponsored by S&P 500 companies dropped 2 percentage points to 86.7% at the end of March from the end of February, Wilshire Consulting said in a monthly report.
The change resulted from a 4.2% increase in liability values, partially offset by a 1.9% increase in asset values. The aggregate funded ratio is up 2.2 percentage points year-to-date, but down 0.5 percentage points over the trailing 12 months.
"March's decline in funded ratios was driven by the significant fall in Treasury yields," said Ned McGuire, managing director and member of the pension risk solutions group at Wilshire Consulting, in a news release. "March's 4.2 percentage point increase in liability value was the largest one month increase since January 2015, when the liability value increased by 6.9%."
As measured by Northern Trust, meanwhile, the average funding ratio for S&P 500 companies with corporate defined benefit plans declined to 85.6% to the end of March from 87.2% from the end of February.
Global equity markets were up 1.3% during March, while the average discount rate decreased to 3.5% during the month from 3.79%, which led to higher liabilities.
"Despite the positive market returns in March, funded ratio declined due to lower rates. This illustrates the importance of a liability-hedging strategy that focuses beyond asset-only returns," said Dan Kutliroff, head of OCIO business strategy at Northern Trust Asset Management, in a news release.