Pension Funding Dropped 15% in Q210

July 6, 2010 ( - Legal & General Investment Management America’s (LGIMA) inaugural Pension Fiscal Fitness Monitor, a quarterly estimate of the overall health of a typical U.S. defined benefit pension plan, found that pension funding dropped 15% in the second quarter of 2010.

The drop was the third largest decline in the last 20 years, according to a press release.  

The Pension Fiscal Fitness Monitor showed the decline in funding ratios came from a mixture of equity market losses and lower bond yields. A selloff in risky assets drove global equity markets lower – the S&P was down 11% – leading the average pension investment strategy to drop 6% for the quarter.   

At the same time, the flight-to-quality drove high quality bond prices up and yields lower. This fall in yields resulted in pension discount rates falling 50 basis points from 6.1% to 5.6%, increasing the present value of a typical pension liability profile by approximately 10%.  

LGIMA’s Head of US Pension Solutions, Aaron Meder said in the announcement that plan sponsors should react to the results by measuring the amount of risk attributable to interest rate, credit spread and equity markets, determining the return expected for each, and readjusting their portfolios so the amount of risk taken matches the expected return.  

The 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.