(April 9, 2012) — Rising interest rates have lowered corporate pension deficit in March, according to a Milliman study.
“For the first time in months, interest rates moved in a decisive positive direction for these 100 corporate pensions,” said John Ehrhardt, co-author of the Milliman Pension Funding Study. “While the positive market performance was consistent with the first two months of 2012, the pairing of asset improvement and a significant reduction in liabilities makes March the best month we’ve seen this year.”
Surveying 100 of the nation’s largest defined benefit pension plans, Milliman found that in March, these pensions experienced a $58 billion improvement in pension funding thanks to a $4 billion improvement in asset value and a $54 billion reduction in the pension benefit obligation (PBO).
Defined benefit plans offered by the 100 US employers were an average of 85.1% funded as of March 31, up from 82% at the end of February and 81.1% at the end of January.
“Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 4.88% were to be maintained throughout 2012 and 2013, these pensions would narrow the pension funding gap from 85.1% to 88.3% by the end of 2012 and to 93.5% by the end of 2013,” Milliman said.
The study by Milliman follows a survey conducted by SEI in February that revealed the top 10 investment priorities for corporate defined benefit plan executives this year. As outlined by the poll, the top 10 priorities for 2012 are as follows:
1. Controlling funded status volatility
2. Improving plan’s funded status
3. Managing duration moving forward
4. Implementing a Liability-Driven Investing (LDI) approach using long-duration bonds
5. Providing senior management with long-term pension strategies
6. Stress-testing the portfolio to gauge its ability to withstand extreme macroeconomic environments
7. Conducting an asset-liability study
8. Implementing an asset allocation process aimed at exploiting shorter-term market inefficiencies to add return and/or mitigate risk
9. Changing funding policies and timelines
10. Defining fiduciary responsibilities for trustees and investment consultants
“Market swings and low interest rates have really taken a toll on the funded status of pension plans over the past few years,” said Jon Waite, Director, Investment Management Advice and Chief Actuary, SEI’s Institutional Group, in a statement following the release of the study in February. “Many plan sponsors now face the burden of making substantial contributions to their plans in order to meet funding requirements. As markets continue to be volatile, plan sponsors continue to pursue sophisticated risk management strategies designed to better control volatility of the funded status of their pension plans.”