The average U.S. corporate pension plan funding ratio dropped during the second quarter due to liabilities increasing faster than assets, two reports estimate.
Legal & General Investment Management America's Pension Fiscal Fitness Monitor estimated the average U.S. corporate pension plan funding ratio as of June 30 was 83.1%, down from 85.6% three months earlier. Meanwhile, the S&P 500 increased 4.3% during the quarter and global equity markets gained 3.8% during the quarter.
Plan discount rates decreased by 40 basis points, as Treasury rates decreased 32 basis points and credit spreads tightened 8 basis points, resulting in a 6.79% increase in plan liabilities. Plan assets with a traditional 60% equity/40% bond asset allocation on average rose 3.63%, resulting in a 2.53-percentage-point decrease in funding ratios over the second quarter.
"We estimate that funding ratio levels for the typical plan with a traditional asset allocation decreased over the second quarter, primarily due to plan liabilities increasing at a faster pace than plan assets," said Ciaran Carr, senior solutions strategist at LGIMA, in a news release. "We have noticed a greater interest from clients in utilizing derivative overlays more holistically across investment strategies. In particular, we have seen a wider interest in equity overlay investment strategies from clients wanting to replicate outright equity exposure, equitize cash, or implement some level of equity protection within their portfolio."
Mr. Carr added: "Finding ways to efficiently reduce funded status volatility while respecting their derisking glidepath continues to be a core objective of many defined benefit pension plans. This is in tandem with clients moving into more custom LDI strategies, where a more integrative approach can be adopted across each plan's investment strategy to help manage and reduce risk where possible."
Meanwhile, money manager Barrow, Hanley, Mewhinney & Strauss estimated the average U.S. corporate pension plan funding ratio as of June 30 fell to 87.8% from 89.2% as of March 31. Barrow Hanley's report cited liability increases outpacing asset gains for the decrease 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 the rest in real estate investment trusts.
By industry, Barrow Hanley said the average funding ratio as of June 30 was highest among financial companies at 108.1% and lowest among communication services at 74.2%.