Pension Fitness Stays Firm

Model pension plan shows liability-driven asset allocations improved funded status in Q2/2014.

Released yesterday, the Pension Fiscal Fitness Monitor indicates that pension plans’ funded status didn’t change much in the second quarter of 2014. The measure is produced by Legal & General Investment Management America, Inc. (LGIMA) on a quarterly basis to help estimate the health of U.S. defined-benefit pension plans. It determines the change in funded status for a model plan that has typical liabilities and an investment strategy which places 60 percent of assets in global equities and 40 percent in global bonds.

For the traditional 60/40 model plan, funded status fell last quarter by less than half a percentage point; it remains just under 90 percent. With Treasury rates declining 22 basis points and credit spreads tightening slightly, overall liabilities for the model plan increased by just over 4 percentage points, while asset values increased 4 percent.

The good news from the report is that companies which have implemented a liability-driven investment strategy saw their funded status improve. The Pension Fiscal Fitness Monitor considers two types of plan de-risking. One involves allocation of 60 percent of assets in equities and 40 percent in fixed-income products. For this model plan, the funded ratio increased just under 1 percentage point in Q2/2014.

The other de-risking model, which LGIMA calls “Level 2 LDI,” looks at the funding ratio of a typical U.S. corporate defined-benefit plan at the beginning of the quarter and builds on that information a custom liability benchmark and derivatives overlay. The Level 2 LDI model plan saw its funded status grow by more than 2 percentage points in the second quarter.

“We estimate that funded status levels for the average corporate defined-benefit plan with a traditional 60/40 allocation were unchanged over the quarter, as strong equity market returns helped to offset lower pension discount rates,” says Don Andrews, head of LDI strategy for LGIMA. “It was a strong quarter for plans that had previously implemented de-risking strategies, as they were largely hedged from the fall in rates.”


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