Pension Plan Funding Ratios Dip in Q2

July 6, 2011 ( - Legal & General Investment Management America (LGIMA) announced in its quarterly Pension Fiscal Fitness Monitor that U.S. corporate defined benefit plan funding ratios fell approximately 2% in the second quarter of 2011.
The decrease in funded status was preceded by three positive quarters totaling over 17% in funding ratio gains.  LGIMA estimates the average funding ratio to be in the range of 85%-90% percent as of the end of the second quarter.

According to a news release, the Pension Fiscal Fitness Monitor showed the decrease in funding ratios came primarily from a decrease in liability discount rates.   Equity markets were volatile intra-quarter but ended the period flat on mixed economic news and political uncertainly.  At the same time, bond yields fell resulting in pension discount rates decreasing 10 basis points from 5.8% to 5.7%, increasing the present value of a typical pension liability profile by approximately 2%.

LGIMA’s Head of US Pension Solutions, Aaron Meder said in the announcement: “As a result of the uncertainty surrounding the global economic and political environment, funding ratios experienced a wild ride throughout the second quarter.  With that being said, ending up with only a 2% decrease in funding ratios is a modest victory for the plan sponsor community.  We estimate the average plan is still up around 15% over the past one-year period.

“Our clients continue to monitor target interest rate and funded status triggers and shift their asset allocation from return-seeking assets to liability hedging assets accordingly.  Looking forward, we expect our clients to continue down their respective de-risking glidepaths as funding ratios continue to improve.”

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% equity/40% aggregate bond (“60/40”) investment strategy, and incorporates data from LGIMA research and Bank of America Merrill Lynch and Bloomberg data.