BlackRock Reveals Negative News for US Corporate Pension Funding

(October 14, 2011) — Funding ratios for typical corporate plans in the United States fell 11.5% during September and are now down 18.8% for the year, according to BlackRock’s Pension Funding Update.

While assets fell by 4.6% for the month and are down 3% for the year, liabilities rose by 7.7% for the month and are up 19.5% for the year.

“Pension plans that are focused on achieving and maintaining a near fully-funded position are realizing that their funded position can rise as quickly as it has fallen,” BlackRock’s report stated. “Many companies are setting plans to progressively ‘lock-into’ their asset-liability gains as funded ratios improve (from either investment performance or contributions into the pension plan). To do this, a dynamic policy that monitors the funded ratio and the surplus risk budget along with these three dimensions is paramount toward success.”

The firm noted that funding rations among US corporate pensions are now below 70%, with nearly all of a typical pension plan’s funded ratio volatility explained by declining equities and Treasury interest rates, along with rising credit spreads.

Earlier this month, Legal & General Investment Management America, BNY Mellon Asset Management, and UBS Global Asset Management all separately released reports showing that corporate funding is on the decline.

LGIMA announced in its Pension Fiscal Fitness Monitor, a quarterly estimate of the change in health of a typical US corporate defined benefit pension plan, that pension funding ratios fell approximately 22% in the third quarter of 2011. During the last two quarters funding ratios have dropped nearly 24%. According to the firm, the average funding ratio will likely be in the range of 70-75% as of the end of the third quarter, approximately down 18% year-to-date.

“Plans using a traditional ’60/40′ investment strategy suffered the second largest quarterly funding ratio drawdown in the past 20 years,” LGIMA’s Head of US Pension Solutions, Aaron Meder said in a statement. “This likely represents more funding risk within their plans than they would have anticipated. As a result, we see the plan sponsor community taking a step back and evaluating when, not if, they will take some risk off the table.”

Meder added: “Even in today’s challenging interest rate and funded status environment we still see our clients taking steps to more effectively manage funding ratio outcomes. For example, we have seen a pick-up in less traditional implementation alternatives. In particular, interest rate option strategies are currently priced at historically attractive levels and allow plans to benefit significantly from rising interest rates while offering valuable funded status protection against further interest rate declines. Going forward, I would expect this trend to continue as corporations look to get back to their core businesses and make pension risk management a priority.”