DB Plan Funding Ratios See Modest Uptick in Q3 2010

October 4, 2010 (PLANSPONSOR.com) - Legal & General Investment Management America’s (LGIMA) Pension Fiscal Fitness Monitor shows that pension funding ratios rebounded 2% in the third quarter of 2010.

The increase was off the back of a 15%-drop in funding ratios during the second quarter of 2010, the company noted in a press release.  

The Pension Fiscal Fitness Monitor showed the increase in funding ratios came primarily from equity market gains which more than offset the increase in liabilities as bond yields continued to drop.  Global equity markets rallied – the S&P was up 11% – leading the average pension investment strategy to an increase of 8% for the quarter.  At the same time, bond yields fell resulting in pension discount rates falling 25 basis points from 5.6% to 5.3%, increasing the present value of a typical pension liability profile by approximately 6%.  

LGIMA’s Head of US Pension Solutions, Aaron Meder suggested plan sponsors should react to the large amount of funded status volatility experienced by explicitly managing the three key drivers of that volatility — interest rate, credit spread and equity market risk.  “Even in today’s environment with low rates and low funding levels, our clients are taking action to more efficiently manage the interest rate, credit spread, and equity market risks in their plans,” he said, in the announcement.  

The quarterly Pension Fiscal Fitness Monitor assumes a typical liability profile and 65% equity/35% aggregate bond investment strategy, and incorporates data from LGIMA research and Bank of America Merrill Lynch and Bloomberg data.