Pension Funding Improves in Q113

April 3, 2013 ( - Pension funding ratios improved significantly in the first quarter of 2013, according to Legal & General Investment Management America’s (LGIMA) Pension Fiscal Fitness Monitor.

LGIMA estimates the average funding ratio rose from the mid 70s to the low 80s as of the end of the first quarter.  

The Pension Fiscal Fitness Monitor showed the funding ratio increase was supported by positive equity returns and higher discount rates. Global equities were up approximately 6.5 percentage points while discount rates were up 32 basis points in the first quarter of 2013. This resulted in the traditional “60/40” funded status increasing by approximately 6.5 percentage points in value. Treasury rates and credit spreads rose 21 and 11 basis points, respectively, leading to the significant rise in discount rates over the quarter.  

“The combination of higher Treasury yields, wider credit spreads and all-time highs in equity markets contributed to significant improvements in funded status for many plans during the first quarter,”said Global Head of Solutions, Aaron Meder.  

“Given the considerable equity rally and the current low levels of implied volatility in equity option markets, we continue to work with clients on equity protection strategies. Plan sponsors are opportunistically reducing potential negative funded status outcomes due to equity drawdowns, locking in the positive impact return seeking assets have provided to portfolios in the past three to five years,” Meder added.  

The Pension Fiscal Fitness Monitor 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.