The average funding ratio for a typical U.S. corporate defined benefit plan rose, from 81.2% to 83.1%, over the last quarter of 2015, according to the Pension Fiscal Fitness Monitor of Legal & General Investment Management America Inc. (LGIMA).

Funded ratios increased over the quarter as return-seeking assets grew more than the marginal return on liabilities over the quarter, the report finds, with global equity markets increasing 5.1% and the S&P 500 increasing 7%. Plan discount rates increased 5 basis points, as Treasury rates increased 15 basis points (bps) and credit spreads tightened 10 bps. Overall liabilities for the average plan were up 0.5%, while plan assets with a traditional 60/40 asset allocation increased 2.9%, resulting in a funding ratio increase of 1.9%. 

“We estimate that funded ratio levels for the typical plan with a traditional asset allocation increased about 1.9% this quarter,” says Don Andrews, head of solutions strategy at LGIMA. “The positive return in equities was the main driver of this increase in funding ratio. Funding ratios for plans that have previously implemented liability benchmarking and/or completion management strategies increased by 0.7% over the quarter.”

Recent volatility in the equity and fixed-income markets underscores the importance of establishing a comprehensive de-risking strategy, Andrews notes. “We continue to see significant interest from plans looking to mitigate funded ratio volatility via implementation of completion management and option based hedging strategies, and would expect this demand to continue.”

The Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical U.S. corporate defined benefit (DB) pension plan, assumes a typical liability profile and 60% global equity/40% aggregate bond (60/40) investment strategy, and incorporates data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.