The Markets August 6, 2012

DB Plans See Large Decline in Funded Status

Defined benefit (DB) plans experienced the worst decrease in funded status in the 12 years since Milliman Inc. began tracking it.
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Pensions experienced a $120 billion decrease in funded status based on a $133 billion increase in the pension benefit obligation (PBO) and a $13 billion increase in asset value. This pushes the pension deficit to a record $533 billion, surpassing the previous record set on August 31, 2010. The funded ratio of 70.9% is the second lowest in the history of this study; on May 31, 2003, the funded ratio bottomed out at 70.5%.

In July, the discount rate used to calculate pension liabilities fell from 4.32% to 3.92%, pushing the PBO up to $1.831 trillion at the end of the month. The overall asset value for these 100 pensions increased from $1.284 trillion to $1.297 trillion.

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Looking forward, if these 100 pensions were to achieve their expected 7.8% median asset return and if the current discount rate of 3.92% were to be maintained throughout 2012 and 2013, these pensions would improve the pension funded ratio from 70.9% to 72.3% by the end of 2012 and to 76.6% by the end of 2013.

Milliman Inc. based its results on 100 of the nation’s largest DB plans.

The complete study is available here.  

 

The Markets August 6, 2012

Institutional Investors Have Negative Returns in Q2

Negative domestic and international returns may have caused U.S. institutional investment plan sponsors in the Northern Trust Universe to lose 1.5% at the median in the second quarter.
 
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However, positive returns in most quarters since 2009 have boosted longer-term performance, and the median plan in the Northern Trust Universe has a three-year return of more than 11%, according to Northern Trust.  

In the second quarter, corporate Employee Retirement Income Security Act (ERISA) pension plans led all segments with a loss of -0.8% at the median, while public funds lost 1.7% and the foundations & endowments segment fell 2% at the median for the three months ending June 30.

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“Asset allocation played a role in relative performance between the segments in the second quarter,” said William Frieske, senior performance consultant, Northern Trust Investment Risk & Analytical Services (IRAS). “Corporate ERISA plans benefited from a higher allocation to fixed income, which was up modestly while equities were down across the board. Public fund performance suffered from a larger allocation to non-U.S. equity. Foundations and endowments lagged the other segments mostly due to a smaller allocation to fixed income, slightly negative results for hedge funds and the poor performance of U.S. equity.”

The median U.S. Equity Program in the Northern Trust Universe was down 3.9% in the second quarter, after gaining 13% in the first quarter. International equities lost more, with the median program down 7% in the quarter. Fixed income programs had a positive return of 2.3% at the median, with most of that performance coming from U.S. programs. Hedge funds returned -0.7%.

 

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The median public fund gained 1.4% in the 12 months ending June 30, ahead of foundations and endowments, which lost 0.4% at the median, but behind corporate ERISA plans, which gained 3.9% at the median. Public funds have a higher allocation to international equities than other segments in the Northern Trust Universe – 16.7% at the median, compared with 10.7% for Corporate ERISA and 7.8% for foundations and endowments – and international equities were the worst-performing major asset class in that period. The median international equity program lost 13.1% in the 12 months ending June 30.

“Public funds have had large allocations to international equity for the last decade, and have in recent years experienced volatility in this asset class,” Frieske said. “While U.S. equity is still the largest asset class in most public funds, its share has dropped from 43% to 32% for the median plan in the last 10 years. Public funds have the smallest allocation to hedge funds of any segment in our universe, but its share has grown in the last decade from 2% to 9% at the median.”

The Northern Trust Universe represents the performance of about 300 large institutional investment plans, with a combined asset value of approximately $712 billion, which subscribe to Northern Trust performance measurement services. 

 

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