Pensions Keep Funded Status Increase for the Year So Far

Despite two months in a row of funded status losses, most firms that track pension funding find the average funded status is still up for the year.

The estimated aggregate funding status of pension plans sponsored by S&P 1500 companies decreased by 1% in March to 87% at the end of the month, as a result of losses in the equity markets, according to Mercer.

For more stories like this, sign up for the PLANSPONSOR NEWSDash daily newsletter.

As of March 31, the estimated aggregate deficit of $286 billion increased by $24 billion as compared to the $262 billion measured at the end of February.

The aggregate funded ratio for U.S. corporate pension plans decreased by 1.6 percentage points to end the month of March at 86.8%, yet remains up 3.6 percentage points over the trailing twelve months, according to Wilshire Consulting.

The monthly change in funding resulted from the combination of a 1.1% increase in liability values and a 0.8% decrease in asset values. Despite March’s decline, the aggregate funded ratio is up 2.2 and 3.6 percentage points year-to-date and over the trailing twelve months, respectively. 

“March was the second consecutive month that saw funded ratios driven lower by negative total asset returns,” says Ned McGuire, managing director and a member of the Pension Risk Solutions Group of Wilshire Consulting. “March’s 1.6 percentage point decrease in funding was the largest drop in 21 months. The retracement in funding was led by a decline in global equities and a rise in liability values that resulted from a nearly 10 basis points decrease in the bond yields used to value pension liabilities,”

According to Northern Trust Asset Management, during the month of March, the average funded ratio for corporate pension plans decreased from 85.7% to 84.5%. Global equity markets were down more than 2% during the month, and average discount rate decreased from 3.94% to 3.89% during the month

Both model pension plans October Three tracks lost ground last month. Traditional Plan A lost 2% while the more conservative Plan B lost less than 1%. For the year, Plan A remains almost 3% ahead, while Plan B is up less than 1%. October Three explains that after a strong January, during which stocks and interest rates rose, capital markets reversed course last month and pension sponsors have given back much of the early gains. Still, at the end of the first quarter, most plans are in somewhat better shape than at the close of 2017 on the strength of lower liabilities. Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds.

Conning’s pension funded status tracker model follows the funded status of the average corporate pension plan in the Russell 3000 universe, and found that in March, funded status of the average Russell 3000 pension plan fell by 1%, from 86% in February to 85%. Year-to-date, the funded status is still up by 2%.

Q1 2018

Legal & General Investment Management America’s (LGIMA) Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, shows that pension funding ratios rose over the first quarter of 2018. LGIMA estimates the average funding ratio rose from 84.2% to 87.3% over the quarter.

This was primarily due to the change in plan discount rates. Global equity markets decreased by 1.75% and the S&P 500 decreased 2.11%. However, this was offset by plan discount rates rising 44 basis points, as Treasury rates increased by 30 basis points and credit spreads widened by 14 basis points. Overall, liabilities for the average plan fell 5.07%, while plan assets with a traditional “60/40” asset allocation only decreased 1.55%, resulting in a 3.1% increase in funding ratios over the first quarter of 2018.

Ciaran Carr, senior solutions strategist at LGIMA, said, “We continue to see an uptick in demand for more customized strategies to help hedge interest rate risk and lock in funding ratio gains after benefitting from an increase in discount rates. Liability benchmarking, completion management, and option-based hedging strategies remain in high demand. We have also seen an increase in the demand for custom credit strategies, particularly from plans focusing on a pension risk transfer or self-sufficiency strategies.”

Aon reports that, year-to-date, the aggregate funded ratio improved from 85.6% to 86.5% and the funded status deficit decreased by $31 billion. As per Aon’s estimates, this change was driven by a decrease in liability of $79 billion, offset by an asset decrease of $48 billion year-to-date.

Pension liabilities decreased by 3.67% as interest rates increased. Ten-year Treasury rates were up by 34 bps over the quarter and credit spreads narrowed by 2 basis points (bps), resulting in a 32 bps increase in the discount rate over the quarter for an average pension plan, according to Aon.

However, Barrow Hanley, a value-oriented investment manager, says its latest corporate pension funded status report finds that average funded ratios fell slightly to 86.7% as of March 31, from 87.1% as of December 31, 2017. Even though liabilities went down 1.3%, pension assets had an even greater drop in Q1 at 1.8%, according to the firm.

Advisers See a Place for Both Active and Passive Investing

Their No. 1 objective for client portfolios is downside risk protection

Advisers believe that both active and passive investing play a vital role, according to Cerulli. More than 80% believe that passive investments can reduce fees and that active managers are ideal for certain asset classes.

“Approximately 75% of advisers agree that active and passive investments complement each other,” says Brendan Powers, senior analyst at Cerulli. “Cerulli argues that the debate of active or passive has shifted to active and passive, with more focus on how to best use both as tools to build more efficient client portfolios.

Get more!  Sign up for PLANSPONSOR newsletters.

“In general, active will retain a key role in asset classes where it adds value over passive,” Powers continues. “The asset classes where more than half of advisers prefer actively managed mutual funds include international/global fixed income (61%), multi-asset class (60%), emerging markets fixed income (58%), emerging markets equity (53%) and international/global equity (51%).”

As to which U.S. equity asset categories advisers plan to boost allocations to, the most common are technology (33%) and small cap (30%). The top portfolio objective that advisers are focused on, cited by 98%, is downside risk protection.

Cerulli also discovered that advisers currently allocate 64% of client assets to actively managed strategies, 25% to passively managed exchange-traded funds (ETFs) and 11% to passively managed index funds. Fifty-five percent of advisers create customized investment portfolios for each client, with 42% starting with investment models that they then alter. Among those advisers using models, 80% use models created by their practice, 68% use home-office models, and 66% use asset manager models.

Advisers plan to use mutual funds less in 2019, with their usage dropping from 32.8% of client assets to 28.2%, with the money going to ETFs and separate accounts, instead.

Among asset managers, 54% say that building out new vehicle offerings is a high priority. This jumps to 60% among large asset managers.

Among asset managers that offer collective investment trusts (CITs), 70% say they provide their company with a large opportunity for growth. Among asset managers that currently do not offer CITs, 14% plan to roll them out in the next 12 months. Eighty-eight percent of asset managers also say that the next generation of target-date funds (TDFs)  in all likelihood will include strategic beta strategies.

Active mutual fund assets totaled $10.7 trillion as of the second quarter of 2017, while index mutual fund assets stood at $2.9 trillion. By 2021, Cerulli project that active mutual fund assets will grow to $13.4 trillion, and index mutual fund assets, to $5.4 trillion.

«