The funding ratio of the typical U.S. corporate defined benefit plan dropped in the first quarter, according to Legal & General Investment Management America’s quarterly Pension Fiscal Fitness Monitor.
The decrease, to slightly less than 90% at the end of March from mid- to low 90% range, is the result of plan discount rates falling 35 basis points overall.
The 36 basis-point fall in Treasury rates caused most of that decline, according to the fitness monitor, causing liabilities to increase by nearly 6%.
That drop outweighed the 1.2% return of global equity markets in the first quarter.
“I think in my opinion it really comes down to (that) 2013 was a one-way ride for the most part in the movement of funding ratio and equity markets and rising rates,” said Jodan Ledford, head of U.S. solutions at LGIMA, in a telephone interview.
“The first quarter kind of highlighted that interest-rate risk is large for plans that are not fully hedging their liabilities and can be the driver of where ratios go,” Mr. Ledford said. “There is somewhat of a sentiment that rates are going in one direction, but this shows there will be periods where you will have more volatility.”
The monitor assumes an investment strategy of 60% global equity and 40% aggregate fixed income.