As 2010 Ends, Good News on Pension Funding Ratios

(January 5, 2011) – Despite a mediocre year, funding ratios of America’s pension plans were up over the last quarter and month of 2010, surveys show.

According to Legal & General Investment Management America’s (LGIMA) Pension Fiscal Monitor, the fourth quarter (Q4) of 2010 saw pension funding ratios increase by 11%, a jump from the 2% increase seen in the third quarter. However, taking a look at the year as a whole, the Fiscal Monitor showed a  funding ratio decline of 1%. According to the firm, the strong Q4 was the result of a bullish equity market (contributing to a 7% average rise in portfolio value) and a rise in bond yields, which decreased liabilities (via a rise in pension discount rates from 5.3% to 5.6%, which decreased the average pension liability by 4%).

According to the release, the Q4 ratio increase was the largest quarter-over-quarter improvement in 15 years. The result: “We estimate, on average, the U.S. corporate plan funding status is approaching 90%,” LGIMA’s Head of US Pension Solutions, Aaron Meder, said in a release.

These results were echoed in standalone December survey as well. According to BNY Mellon Asset Management, the average funding status of American corporate plans rose 3.8% to 84.3% in the final month of 2010, the best number since March of last year. However, while the figures varied slightly from Legal & General’s measurements, BNY Mellon also reported a lackluster year-over-year change in funding ratio of just 0.8%.

Looking forward, BNY Mellon’s Peter Austin noted in a release that “…we expect US plan sponsors to continue efforts to closely manage plan funding volatility. In particular, we believe adoption rates for risk reduction programs based on target funding levels will increase, especially in the presence of higher interest rates and strong equity returns.”