The average U.S. corporate pension plan funding ratio increased during the third quarter, according to two reports.
Legal & General Investment Management America's Pension Fiscal Fitness Monitor estimated the average U.S. corporate pension plan funding ratio as of Sept. 30 was 77.9%, up from 75.3% three months earlier. The S&P 500 and global equity markets rose 8.93% and 8.25%, respectively, during the quarter.
Plan discount rates decreased by 6 basis points, as Treasury rates rose 3 basis points and credit spreads tightened 9 basis points. Plan assets with a traditional 60% equity/40% bond asset allocation rose 5.22%, resulting in a 2.6 percentage-point increase in funding ratios over the third quarter.
"We estimate that funding ratio levels for the typical plan with a traditional asset allocation increased over the third quarter, primarily due to strong global asset performance positively impacting plan assets," said Katie Launspach, senior solutions strategist at LGIMA, said. "The third quarter saw a substantial increase in equity returns, which was the main driver of the improvement in funded status for pension plans."
Ms. Launspach added: "Volatile times like this show the importance of decoupling risks that can impact pension plan funded status, such as interest rate and credit spread risk. Separating these risks can help plans design and implement a more appropriate LDI strategy. Hedging more interest rate risk through a completion framework and avoiding defaults and downgrades through active credit management are two ways that can help improve funded status outcomes in such volatile markets."
As measured by Barrow, Hanley, Mewhinney & Strauss, the average corporate pension plan funding ratio is estimated to have increased to 84% as of Sept. 30 from 81.4% as of June 30. The money manager attributed the increase to strong equity market performance offsetting pension liability increases.
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 the remainder in real estate investment trusts.
By industry, Barrow Hanley said the average funding ratio as of Sept. 30 was highest among banks at 101.7% and lowest among airlines at 73%.
