Corporate Pension Funding Sees Mixed February Results

The funded status of the largest 100 corporate defined benefit plans rose to 109.4% at the end of February from 109.1% at month-end January—the highest since the 109.9% mark observed at month-end July 2001, according to Milliman’s Pension Funding Index. But across the board, firms reported both peaks and valleys last month.

Rising Treasury rates since the February 28 attacks on Iran by the U.S. and Israel are not reflected in the February data.

“Plan sponsors have worked hard to gain this position, taking help from higher interest rates and sustained market performance over the last two years,” says Zorast Wadia, a principal in Milliman’s New York office. However, they must “be prepared for the storm” as well.

The Ups

L&G Asset Management, America estimated that the average funding ratio increased slightly in February, to 107.3% from 106.6% in January. Global equities were up 1.3%, and the S&P 500 Index was down 0.8%. Discount rates were estimated to have decreased 13 basis points over the month, as the Treasury component fell 24 bps and credit spreads widened by 11 bps.

Wilshire’s pension finance monitor estimated that the aggregate corporate pension funded ratio increased by 0.5 percentage points in January, ending the month at 105.8%.

The Downs

Though not projecting the aftermath of any storm, other firms reported lower funding levels.

MetLife Investment Management estimated that the average U.S. corporate pension funded status fell to 105.3% last month, down from 106.8% in January. Discount rates fell, leading liability increases to outpace asset gains.

Gallagher found discount rates dipped between 0.15% and 0.20% in February, ending the month at 5.5%, down 0.12 percentage points from the end of January.

Both model plans tracked by October Three Consulting lost ground in February. Plan A, a traditional 60/40 equity/bond allocation, lost 1% but remained nearly 1% above fully funded for the year. The more conservative Plan B, comprised of 80% bonds, lost a fraction of 1% and was just a hair above fully funded.

Brian Donohoue, a partner in October Three, says the stories firms are telling about corporate funding levels are not that different, despite some crossing different ends of zero.

“There wasn’t a significant movement of funded status for any plans,” Donohue says. “In February, there was more a divergence in the returns under different stock exchanges.”

The three major U.S. stock indexes that October Three follows yielded mostly negative returns, while the two international indexes the firm tracked posted overwhelmingly positive gains. The MSCI EAFE Index, covering regions described as Europe, Australasia and the Far East, was up 4.7%, while the MSCI EM Index, covering regions classified as “emerging,” such as China and India, rose 5.9%.

Other plans invest in different stocks and make different allocations. Plans tracked by MetLife, for instance, invested in domestic stocks exclusive to the FTSE Russell 3000 Index, while plans Wilshire followed held assets in U.S. equities on the FT Wilshire 5000 Index only.

Donohue adds that a plan with more liability-driven investments is likely to yield more stable returns than one with a greater concentration of equities. For example, October Three’s Plan B, more heavily concentrated in bonds than Plan A, was more resistant to volatility than Plan A last month.

When funding statuses diverge, Donohue advises plan sponsors to remember, “Your mileage may vary a little bit—check in on your own plan’s performance based on how you’re invested.”

Yet ongoing market volatility—including that resulting from the strikes on Iran—could push the possibility of a bad year to the forefront, Donohue says. Pension funding is already down in March.

“All [was] quiet here at the end of February,” says Donohue. “It’s right before the real story starts.”