Corporate Pension Funding Continues to Improve

The report, “Pension Fiscal Fitness Monitor,” is a quarterly estimate of the change in health of a typical U.S. corporate defined benefit (DB) pension plan, created by Legal and General Investment Management America (LGIMA). The report estimates that the average funding ratio of corporate pension plans rose from approximately 90% at the close of the third quarter to between 91% and 95% at year-end.

The report also shows that funding ratios rose meaningfully over the fourth quarter, supported by strong equity markets. Global equity markets rallied over 7% during the quarter, while plan discount rates were slightly higher. This resulted in the traditional “60/40” funded status (60% stocks, 40% bonds) increasing by about 3 percentage points in value. Credit spread tightened 23 basis points, offsetting the majority of the 26 basis point rise in Treasury rates.

“Completing the ongoing theme of 2013, the combination of strong equity markets and continued increases in pension discount rates resulted in the fifth straight quarter of funding ratio improvement for the average pension plan,” says Jodan Ledford, LGIMA’s head of U.S. solutions. “Over 2013, plan funding ratios have improved by over 15 percentage points, rising from the mid 70s to the lower 90s. As a result, plans that have adopted a pension risk management strategy have continued to de-risk into more fixed income while beginning to focus on more customized solutions.”

Ledford added that LGIMA has seen increased activity and interest in explicit liability benchmarking mandates, as well as strategies involving derivative usage to shape funding ratio outcomes.

The Pension Fiscal Fitness Monitor report assumes a typical liability profile and an investment strategy with 60% in global equities and 40% in aggregate bonds. The report incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.

More information about the report will be available on the LGIMA website in the near future.