Big Pension Payments Loom

Shift to fixed-income assets could buoy bond prices.

Many companies will make big contributions to their pension plans again this year, raising such issues as what asset allocation companies should use and how to time their contributions. Given the trend toward increasing pension plans’ allocations to fixed-income securities, consultants point out that the demand from pensions could affect the pricing of investment-grade corporate bonds.

As interest rates inched up and stock markets rallied this year, the funded status of defined-benefit pension plans has improved. Benefits consultancy Mercer put the aggregate funded ratio of S&P 1500 companies at 82% as of March 31, up from 75% at the end of 2011.

Collie also expects pension contributions to have an impact. “If you look specifically at corporate bonds, especially the long end of the market, you have a relatively small market and not that heavily traded,” he says. “If a significant part of these contributions goes into long corporate bonds, which we expect to happen, the relative size of contributions to daily volume creates the possibility of market impact for sure.”

Collie notes that many pension contributions from calendar-year plans occur in September and warns that plan sponsors investing their contributions this year could face a “September rush.” It suggests that companies with cash on hand consider making their contributions earlier in the year.

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