US Corporate Pension Plans’ Funded Ratios Fell 4 Points in February

Company retirement systems dropped to an 82% average funded ratio, the lowest level since 2016, thanks to the coronavirus. 

As the economic effect from the coronavirus continues to reverberate through markets, the funded ratios for corporate pension plans in the US slid 4 percentage points in February from the month before, dropping them to their lowest levels since 2016. 

On average, company pension systems ended the month with an 82% funded ratio, as both asset values in portfolios fell 1.8%, while liabilities rose 2.8%, according to a monthly report from investment advisory firm Wilshire Consulting. 

“February’s decrease in funded ratio was driven by a perfect storm of economic forces for corporate defined benefit pension plans,” Ned McGuire, managing director at Wilshire, said in a statement. 

A significant decline in risk assets is among the factors driving the decrease. Meanwhile, liabilities jumped thanks to a 40 basis point decrease in Treasury returns, despite an increase in credit spreads. 

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That means year-to-date, and for the past 12 months, the funded ratio dropped roughly 6.9 and 8.8 percentage points, respectively.

The lower returns are a concern for individual state pension plans, such as the New York State Common Retirement Fund, which has its fiscal year end coming up this month immediately after the historic market beating from the coronavirus.

“As our fiscal year end approaches, we’re closely monitoring markets and cautiously optimistic that we meet our investment target this year,” a spokesman for the New York fund said in a statement this week. 

Other retirement systems are worrying about how the disease will affect their first fiscal quarters for the year. About 70% of pension plans end their fiscal years in June, while another 30% end in December, according to the Center for Retirement Research at Boston College. A small number, including the Common Retirement Fund, end in March. 

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BlackRock Changes Global Outlook Due to Coronavirus

The world’s largest asset manager said it’s reducing cyclical exposures to global assets, such as emerging markets and Japan.

 

After predicting that global growth will edge higher in 2020, BlackRock said this week that it has lowered its outlook for the year in light of the “material” impact of the coronavirus. The institutional investor is also taking a cautious approach to its own investments. 

The world’s largest asset manager said it will be reducing cyclical exposures in global risk assets, particularly in emerging markets (EMs) and Japan. The latter is teetering on the brink of a technical recession after contending with its own outbreak.

“What we’ve done in our own portfolios is kind of bring those risks back to benchmark weight so that they reflect the changed world,” Mike Pyle, global chief investment strategist at BlackRock, said on the company podcast “The Bid,” released Wednesday. 

Instead, the investment firm is relying more on resilient equity markets, such as minimum volatility assets and quality assets. Pyle said he is keeping an eye on companies with high-quality balance sheets and sufficient cash flows that help it remain resilient in a storm. He also maintained the growing importance of US Treasuries as a ballast in portfolios. 

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“Those are places that tend to have really good performance in difficult market environments,” Pyle said. 

BlackRock said in its blog that it does not expect a US or global recession, pointing out that underlying economic conditions are robust. It also expects any market effect from the coronavirus to be temporary. 

But the pullback is a marked change for the institutional investor, which only last month took an overweight position on Japan. BlackRock predicted the country would benefit from a global manufacturing recovery and a lull in US-China trade tensions this year. The investment firm also had an overweight position in EM equities, which it saw as beneficiaries from a global recovery. 

The tonal shift comes as global markets are still reeling from the COVID-19 fallout. After dipping into correction territory last week, the three major US indexes fell yet another 3% across the board in Thursday trading. California’s decision to declare a state of emergency after an uptick in cases, fueled renewed investor concern. 

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