Study Shows US Pension Funding Ratios Tumble in Q2

(July 6, 2010) — In a quarterly estimate of the overall health of a typical US defined benefit pension plan, Legal & General Investment Management America (LGIMA) announced today that funding ratios dropped 15% in Q2 in 2010.

The drop was the third largest decline in the last two decades.

“The study reviews the relative performance of pension assets vs. pension liabilities along with what drove that relative performance,” said LGIMA’s Head of US Pension Solutions Aaron Meder to ai5000. “This quarter pension assets significantly underperformed the performance of pension liabilities as assets fell (as equities dropped) and liabilities increased in value (as pension liability discount rates dropped).” He added that the average corporate defined benefit plan started the quarter around 80% funded and is now is around 65% funded, which puts most plan sponsors in an even more difficult funding predicament during a challenging economic climate.

The quarterly estimate was derived from the firm’s Pension Fitness Monitor, which showed the drop in funding ratios came from both equity market losses and lower bond yields, according to a statement.

Meder said plan sponsors should handle the drop by measuring the “amount of risk attributable to interest rate, credit spread and equity markets, determining the return expected for each, and readjusting their portfolios so the amount of risk taken matches the expected return.”

Separately, according to a recent survey by SEI Global Institutional Solutions, 49% of US multiemployer defined benefit pension plans face funding ratios of 80% or less in 2010, with 67% of respondents focusing on liabilities over returns when setting their investment strategies. The study showed 26% of respondents’ plans were below 65% funded, putting them in the 2006 Pension Protection Act’s “red zone” category, and 23% were 65% to 80% funded, placing them in the PPA’s “yellow zone” category. The remaining survey respondents’ pension plans were above 80% funded.