2013 Gain Wiped from US Corporate Pension Funding Rates

(April 1, 2014) — The average funding ratio of US corporate defined benefit plans has dropped 4% to 91% in the first quarter of 2014, according to UBS Global Asset Management.

The decline was especially distinctive after a 17% improvement in funding ratio last year, the UBS report said.

“We believe that the 4% decline in the first quarter of 2014 should serve as a catalyst for plan sponsors to proactively protect their gains by adding to their hedging/de-risking program,” said Robert Guzman, head of pension risk management at UBS Global Asset Management, in a statement.

According to UBS data, investment returns were just 2.1%, not high enough to offset the 6.1% rise in liabilities.

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“We’ve already taken back a quarter of 2013’s gain,” Guzman told aiCIO. “These are warning signals. For investors who are on the fence about an investment decision, they should be careful. They should look to hold onto as much as they can and do all they can to decrease downside volatility.”

Legal & General Investment Management America (LGIMA) reported similar findings.

“Despite slight positive returns in equity markets, volatility again returned to the markets and provided a bit of wake-up call for plan sponsors who have primarily experienced a one-way ride in funding ratios over the past year,” said Jodan Ledford, LGIMA’s head of US solutions, in a statement.

During the first quarter this year, the US equity market was flat, with the S&P 500 recording a 1.81% total return. 10-year US treasury bond yields decreased 41 basis points (bps) to 2.72% while the 30-year US treasury bond yields fell 41 bps to 3.56%.

These drops in treasury rates led plan discount rates to fall more than 30 bps, LGIMA said, as average plan assets rose just over 1%.

“It should be noted that many plans who participated in de-risking their plans as funding ratios improved enjoyed a much less volatile quarter, with little to no funding ratio drawdowns,” said LGIMA’s Ledford.

UBS’ Guzman said corporate pensions should make investment decisions focused on further de-risking and sustaining their current funding ratio as much as possible.

“While it’s a hard game to make predictions on how things will pan out the rest of the year for corporate pensions, these figures could help investors look to take some chips off the table,” he said. “If they want to de-risk, they should do it sooner than later.”

(April 1, 2014) — The largest investors in Japan have started to shed their domestic equity holdings, hurting Prime Minister Shinzo Abe’s plans for their capital to help the country’s economy recover.

Last week, Reuters reported these pension funds, which have more than $170 billion in combined assets, had started selling their equity holdings before the end of the tax year, which begins today.

Yesterday these investors continued the pattern, the news agency reported, citing sources within the country’s financial markets who were concerned they were moving too fast, too soon to fit with a scheduled retreat from relatively risky assets.

The start of the tax year brings reforms for corporate pension plans that are designed to sharpen up their investment strategies and get them in to good health. They have been given five years to improve or close.

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Despite equity markets sinking over recent months—in the first quarter of the year, the Nikkei lost 9%—these investors still decided to sell, market participants said.

“Trust banks tend to buy for rebalancing when the market is down. So we need to think something abnormal was happening,” Kenji Shiomura, senior strategist at Daiwa Securities told Reuters. “It’s likely to be pension funds’ selling. We could see more such selling in coming weeks.”

Between March 10 and March 20, the Nikkei fell by almost 6%. The index of Japan’s leading stocks has since rallied, but remains around two percentage points lower than at the start of the month.

These moves could be damaging for the Japanese Prime Minister’s plan to shore up the country’s equity markets with pension cash. Moving large amounts of capital into the Nikkei should provide a boost that would attract other investors.

However, data monitor EPFR said the Nikkei’s positive bump last week failed to fuel investor appetite, resulting in outflows from Japanese equity funds.

Taku Arai, product manager in Japanese Equities, at Schroders, remained unruffled by recent stock market movements.

“Japan’s encouraging inflation readings and employment data last week showed further evidence of the country’s improving economic trend and its progress in combating deflation,” said Arai. “While there are still concerns about the fading effect of yen weakness last year and slower demand due to a consumption tax hike from April 1, we remain positive on Japan’s longer term structural trends, namely an exit from deflation, a tightening labour market, and recovering levels of corporate spending.”