The first quarter of 2013 ended with the funded status of U.S. corporate defined benefit pension plans having improved significantly from the end of the year, thanks primarily to strong equity returns and higher discount rates, according to several reports.
BNY Mellon Investment Management, Mercer, Legal & General Investment Management and UBS Global Asset Management all place the funded status of the typical U.S. corporate defined benefit pension plan around 82% as of March 31, up about five percentage points from the end of the year.
According to a monthly study from BNY Mellon Investment Management, the funded status of the typical U.S. corporate defined benefit pension plan rose 1.9 percentage points to 82.6% in March. The report credited the increase to healthy equity returns, while Aa corporate spreads increased by two basis points, raising the Aa corporate discount rate to 4.09%. The funding ratio of a typical plan at the end of 2012 was 76.3%.
Jeffrey B. Saef, New York-based managing director and head of the investment strategy and solutions group at BNY Mellon, said in a telephone interview that the numbers for the first three months of the year make some sense.
“It's like a puzzle. The various pieces work together,” Mr. Saef said. While in the summer of 2012, equity markets dropped, rates dropped and spreads dropped, “now we're seeing just the exact opposite. Equity markets are rallying, rates are rising, spreads are rising.”
In contrast to the strong first quarters evidenced in the last couple of years that were followed by drops in the second and third quarters in those years, Mr. Saef said the global macroeconomic tone is better now with strong housing, auto, durables and employment sectors.
“The tone is certainly better,” Mr. Saef said. “Looking forward on (first-quarter) earnings, you'd hope that would continue along with stable and rising rates.”