The average U.S. corporate pension plan funding ratio increased over the fourth quarter due to market movements, 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 Dec. 31 was 83.2%, up from 79.2% three months earlier. Both the S&P 500 and global equity markets rose 9.1% during the quarter.
Plan discount rates increased by 3 basis points, as Treasury rates rose 26 basis points and credit spreads tightened 23 basis points. These changes had a minimal impact on plan liabilities. Plan assets with a traditional 60% equity/40% bond asset allocation rose 5.45%, resulting in a 4 percentage-point increase in funding ratios over the fourth quarter.
"We estimate that funding ratio levels for the typical plan with a traditional asset allocation increased over the fourth quarter, primarily due to a strong equity market propelling plan assets to increase at a faster pace than plan liabilities," Katie Launspach, senior solutions strategist at LGIMA, said.
Increases in equity returns were than driver for pension plans' improved funded status, Ms. Launspach said, noting that the funded status for the average plan ended the year at a level comparable to the start of 2019.
"However, funded status fluctuated significantly throughout the year mainly due to a volatile interest rate environment," she said. "Understanding and controlling funded status volatility is one of the main objectives of a well-designed LDI strategy. Adopting a completion framework is one-way pension plans can manage uncompensated risk more effectively through volatile market environments."
Meanwhile, money manager Barrow, Hanley, Mewhinney & Strauss estimated the average U.S. corporate pension plan funding ratio as of Dec. 31 rose to 88.7% from 85% as of Sept. 30. Barrow Hanley's report cited equity-driven asset gains outpacing liability increases 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 the remainder in real estate investment trusts.
By industry, Barrow Hanley said the average funding ratio as of Dec. 31 was highest among financial companies at 101.7% and lowest among airlines at 74.9%.