Home > News > Research > Corporate Pension Plans’ Funded Status Dips for First Time Since April
Research

Corporate Pension Plans’ Funded Status Dips for First Time Since April

A surge in liabilities from low discount rates dropped aggregate ratios 1.3 percentage points to 79.9%, Wilshire says.
By Sarah Min


The aggregate funded ratio for US corporate pension plans dipped in July for the first time since the start of the economic recovery. 

Last month, funded status fell by 1.3 percentage points to 79.9% for corporate defined benefit (DB) plans, Wilshire Associates said in a report. That’s the same funded status corporate plans notched March 31 after the coronavirus crashed markets and the lowest level since October 2016. 

A surge in liabilities drove down the funded ratio: Assets in July jumped by 4%, but liabilities climbed higher to 5.6%. A roughly 20 basis point (bp) fall in Treasury yields in July and a 15 basis point drop in corporate bond spreads helped drive up liabilities, according to Wilshire Managing Director Ned McGuire. Discount rates are hovering in the low- to mid-2% range, or the lowest level in more than a decade.

Cumulatively, the aggregate funded ratio has fallen by 7.2 percentage points since the start of the year, when the funded status hovered at 87.1%, as of December 31. Over the past 12 months, funded ratios have tumbled 8.9 percentage points from 88.8% last July. 

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

Historically low discount rates are also continuing to pressure corporate pension plans despite strong investment gains in the equities market. Since March lows, the S&P 500 is up nearly 49% and has nearly recovered all its losses from the pandemic-induced market rout. Year to date, the index is up 3%. 

The quick recovery has made some investors nervous that enthusiastic markets will crash in the second half of the year. This week, CNBC Mad Money host Jim Cramer even commented, “I can’t take how stupidly bullish this market can be.” 

Other reports from Milliman have found that corporate pension plans had already seen their funded status declining in May. For corporate DB plans, falling discount rates will continue to add pressure to companies looking to de-risk their plans.   

The findings are based on a portfolio asset allocation with 22% in US equities, 17% in non-US equities, 25% in core fixed income, 34% in long-duration fixed income, and 2% in real estate.

Related Stories: 

Nonprofit Hospitals’ Pension Funded Status Could Weaken After COVID Relief

Low Funded Public Pensions Might Not Survive the Decade

Goldman Sachs Estimates Public Pensions Now Less than 60% Funded on Average

Tags: , , , , , ,

Home > News > Market Moves > How David Einhorn Is Betting on Higher Inflation
Market Moves

How David Einhorn Is Betting on Higher Inflation

Hedge fund chief thinks a small amount of inflation is coming, so he goes for TIPS derivatives, among other plays.
By Larry Light


Inflation? What inflation? Hedge fund operator David Einhorn, who famously goes against the grain, is betting that the Consumer Price Index (CPI) will tick up in the US. Not a lot, mind you, but enough to give him a good result.

Right now, inflation is muted. In the 12 months through mid-year, the CPI rose 0.6% after dipping 0.1% in May.

To exploit what Einhorn sees as a more robust CPI ahead, his Greenlight Capital (assets: $7 billion) is taking positions in inflation swaps, which are derivatives based on Treasury inflation-protected securities (TIPS). His positions are in two-, five-, and 10-year swaps. In May, he wrote in a second-quarter letter to clients, those instruments implied annual CPI increases of just 0.1%, 0.8%, and 1.3%.

“As annual inflation has averaged 1.7% over the past 10 years,” he wrote, “we recognized that we could make a substantial return if actual inflation merely reaches the long-term average.” At the end of the second quarter, he went on, the trend was moving in Greenlight’s direction: Inflation expectations have bounced up to 1.3%, 1.4%, and 1.6%.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news.

While he noted that higher inflation, even if limited, would harm Treasury prices, Einhorn said he didn’t want to short federal government bonds. The intervention of the Federal Reserve in the credit markets make that too iffy, he reasoned.

Meanwhile, Greenlight also has bought stocks in areas that should benefit from a little higher inflation. A long-time believer in gold, the firm has increased its holdings in the VanEck Vectors Gold Miners exchange-traded fund (ETF). Gold is rapidly rising in price, more out of recession fears than inflation ones. Yet inflation would help the rise.

Another Greenlight position is in Atlas Air Worldwide Holdings, which he thinks should be helped by a shortage of air-freight capabilities, owing to the sidelining of many passenger jetliners. These commercial planes are used to ferry cargo in their holds, meaning there is an inflationary shortage of this transportation.

Other stock holdings are homebuilder Green Brick Partners, which should benefit from elevating home prices, and CNX Resources, a natural gas producer—whose product is hurting pricewise. Greenlight clearly expects low-lying natural gas prices to ascend.

Two large Greenlight short sales are not in the area of consumer inflation, but share price inflation. One is against Wirecard, the German digital payments company that Einhorn for years has labeled a fraud. Now that Wirecard is in legal trouble, its stock has tumbled. The other short is Tesla, the electric vehicle maker, whose stock has surged more than sixfold over the past year. Einhorn contends that Elon Musk’s auto company is playing accounting games that eventually will come to light.

These strategies have yet to bear fruit overall. Greenlight has suffered losses this year of 17.5%, although that was eased by a good July showing, up 4.1%. Einhorn first came to public notice when he presciently, and lucratively, shorted Lehman Brothers in 2007, just before it collapsed. Another good short call was in Green Mountain Coffee Roasters, whose stock later tanked (another company bought it cheap).

Related Stories:

Beware of Corporate Debt, Even Non-Junk, Says David Einhorn

Will Mega-Stimulus Bring Inflation After COVID and Recession Are Gone?

Rethinking Your Inflation-Protection Strategy

Tags: , , , , , , , ,

«