The Legal & General Investment Management America, Inc. (LGIMA) Pension Fiscal Fitness Monitor (PFFM), a quarterly estimate of the change in health of a typical U.S. defined benefit (DB) pension plan, found the average funding ratio fell from the low to mid-90s to slightly under 90% as of the end of the first quarter.
The PFFM showed funding ratios fell slightly over the quarter as flat equity markets were unable to offset strong liability returns. Global equity markets were slightly up for the quarter (approximately 1%) while discount rates were sharply lower. This resulted in the traditional “60/40” funded status falling by approximately 4 percentage points. Plan discount rates fell more than 30 basis points. While the majority of the decline in plan discount rates was attributed to the 30 to 40 basis point fall in Treasury rates, this was somewhat offset by credit spreads widening slightly over the period. Overall liabilities returned nearly 6 percentage points, while the average plan assets increased by just over 1%.
“Despite slight positive returns in equity markets, volatility again returned to the markets and provided a bit of a wake-up call for plan sponsors who have primarily experienced a one-way ride in funding ratios over the past year,” says Jodan Ledford, LGIMA’s head of U.S. Solutions, based in Chicago. “While highlighting the performance of ‘a typical U.S. corporate defined benefit pension plan,’ it should be noted that many plans who participated in de-risking their plans as funding ratios improved enjoyed a much less volatile quarter, with little to no funding ratio drawdowns.”
The PFFM assumes a typical liability profile and 60% global equity/40% aggregate bond (“60/40”) investment strategy, and incorporates data from LGIMA research and Bank of America Merrill Lynch and Bloomberg.
LGIMA is a provider of fixed-income and liability driven investment (LDI) strategies for the U.S. institutional market.