The company’s Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, shows average funding ratio rose from a mid-to-high 80% to approximately 90% as of the end of the third quarter.
The increase was supported by strong equity markets. Global equity markets rallied and were up more than 5%, while discount rates were modestly higher. This resulted in the traditional “60/40” funded status increasing by approximately 4 percentage points. Credit spreads tightened 14 basis points, offsetting the majority of the 22 basis point rise in U.S. Treasury rates.
“Equity markets continue to fuel higher funding ratios,” said LGIMA’s Head of LDI Strategy Gary Veerman. “Since mid-2012 global equity markets are up nearly 40%. Over the same time period, discount rates have risen over 100 basis points. We have seen the typical plan’s funding ratio increase from the low 70s to approximately 90%. A 20% rise in funding status has certainly gained the attention of many plan sponsors to take funding risk off the table implementing via physical bonds and/or derivative strategies.”
Veerman added, “Pension asymmetry, or the concept that funding status upside has diminishing marginal benefits above 100%, should be a consideration for plans approaching full-funding, particularly for those who remain significantly unhedged to interest rates and/or continue to maintain a large allocation to equities. Currently, there are attractively priced derivative-based interest rate and equity strategies that can be used, forgoing some funding status upside participation for very valuable downside protection.”
The Pension Fiscal Fitness Monitor assumes a typical liability profile, a 60% global equity and 40% aggregate bond (“60/40”) investment strategy, and incorporates data from LGIMA research, as well as from Bank of America Merrill Lynch and Bloomberg.
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