US Corporate Pensions See Shocking $93 Billion Funding Gain in March

Defying forecasts of another grim month due to global market volatility, the funded status of the 100 largest US corporate pension funds surprisingly increased $93 billion in March despite deteriorating economic conditions amid the COVID-19 pandemic.

Just a month after hitting its lowest level in more than three years the Milliman 100 Pension Funding Index (PFI), which tracks the funded ratio for the 100 largest corporate pension plans in the US, rose to 85.6% from 82.1% at the end of February. Consulting firm Milliman said the funding improvement was the direct result of a strong surge in the monthly discount rate to 3.39% from 2.69%.

“It’s a stunning twist of fate that a month so turbulent as March—given the market conditions and the ongoing global pandemic—actually resulted in positive funding news for corporate pensions,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. A month ago, Wadia predicted that “March will likely be another dismal month for corporate pension funding.”

During March, the tumbling stock markets led to an $85 billion decline in the market value of the pension funds’ assets to $1.516 trillion from $1.601 trillion at the end of February. This is based on a monthly loss of 5.08%. Milliman said there were only five other months during the last two decades when there has been larger investment losses, and the last one was October 2008 during the Great Recession.

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At the same time, the projected benefit obligation (PBO), or pension liabilities, decreased to $1.771 trillion at the end of March.

While February’s discount rate was the lowest discount recorded in the 20-year history of the Milliman 100 PFI, March’s discount rate increase was the fifth largest ever recorded in the study. The last time the discount rate posted a comparable increase was in December 2009.

For the first quarter of 2020, a 5.7% investment loss caused the assets of the pension funds to fall by $103 billion compared to plan liabilities, which increased $48 billion. Discount rates increased 19 basis points (bps) during the quarter and helped limit the funded status erosion. The net result was a funded status worsening of $55 billion as the funded ratio of the Milliman 100 companies decreased to 85.6% at the end of March from 89% at the beginning of the year.

Over the last 12 months through March, the cumulative asset return for the pensions was 2.6%, and their funded status deficit has widened by $81 billion. The funded status loss is the combined result of declines in discount rates during most of 2019 and investment losses experienced during the first quarter. Discount rates fell 39 basis points over the past year to 3.39% as of March 31.

Milliman said if the companies in its index earn the expected 6.6% median asset return per the 2019 pension funding study, and if the discount rate stays at 3.39% through 2021, the funded status of the surveyed plans would increase to 88.1% by the end of 2020 and 91.6% by the end of 2021. For purposes of the forecast, the firm assumed 2020 and 2021 aggregate annual contributions of $50 billion.

It also said that under an optimistic forecast that has interest rates rising to 3.84% by the end of 2020 and 4.44% by the end of 2021, with annual asset gains of 10.6%, the funded ratio would climb to 96% by the end of 2020 and 112% by the end of 2021. However, under a pessimistic forecast that assumes a discount rate of 2.94% at the end of 2020 and 2.34% by the end of 2021, with 2.6% annual returns, the funded ratio would decline to 81% by the end of 2020 and 74% by the end of 2021.

Corporate Pension Plans Drop to Lowest Level in 8 Years

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Tags: Corporate Pension, discount rates, Funded Ratio, Funded Status, Milliman, Milliman 100 Pension Funding Index, Zorast Wadia

UK-based mutual funds had their largest outflows on record for any month by far in March as investors redeemed £3.1 billion ($3.9 billion) in fund holdings, according to global funds network Calastone. This is nearly three times the previous monthly record, which took place during June 2016 when the United Kingdom voted to leave the European Union.

Despite the stock markets tumbling by as much as 25% during the month, it was fixed income funds—not equity funds—that took the brunt of the retreat. At the end of the month, an unheard of £3.7 billion left fixed income funds, which was 13 times more than the previous record, which occurred in January 2019. In contrast, equity funds only saw £244 million of outflows for the month.

“Outflows in March wiped out accumulated inflows from the preceding eight months,” said Calastone, which measures UK investor sentiment with its Fund Flow Index (FFI). “Investors reacted to sharply widening yield spreads as a focus on credit quality highlighted the risks that weak sovereign borrowers and corporates with overstretched balance sheets may find their debts unsustainable.”

During the month, fund flows swung wildly from week to week as the beginning of the month saw buying, the middle saw indiscriminate selling, and the last few days saw selective buying in growing volume.

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Calastone also said that investors were “spooked” by technical factors causing an acute dollar liquidity squeeze that required coordinated central bank remedies, and that quarter-end portfolio rebalancing drove bond sales. The fixed income FFI fell to an unprecedented 30.4, which means that selling activity was more than twice as much as buying.

“The temporary loss of fixed income as a safe-haven asset class to counterbalance some of the huge losses in equity markets left investors with little option but to ride it out or park their money in cash or cash-equivalents,” Edward Glyn, Calastone’s head of global market, said in a statement. “Equally, the courage of investors not to dump their equity holdings is surprising,” he said, adding that “the COVID-19 crisis has undoubtedly had a bigger impact than the EU referendum shock, yet so far equity funds are weathering the storm rather well.”

Funds focused on UK equities drew £508 million of new capital, which was their second-best month in four years, with only December 2019 seeing higher traffic.

Investors fled active funds, which reported their second-worst month on record with £1.7 billion in outflows, and they sought shelter in passive funds, which saw record inflows of £1.4 billion during the month. European equity funds suffered their second worst outflow on record, losing £500 million, while global funds saw inflows.

Glyn said that while the sharp divergence between passive and active funds can be partially explained by the growth of index investing and monthly direct debits, these factors aren’t enough to account for the huge disparity in March.

“It seems investors attempting to catch market troughs may simply be focusing on timing and just relying on the index to do the rest,” Glyn said. “But, in fact, active managers tend to do rather well in difficult times for stock markets so the big outflows from that segment at a time of such big inflows to passive funds are a little surprising.”