Following a decrease in funded status during the first month of 2014, representative open and frozen pension plans increased funding by 1.6% and 1.1% respectively, according to the February installment of “The Russell LDI Update.” The report is authored by Marty Jaugietis, managing director of LDI solutions for Russell Investments and Calvin Gong, an LDI portfolio manager for Russell Investments.
In terms of the 19 U.S. corporations with pension liabilities exceeding $20 billion, which Russell calls the “$20 billion club,” an overall improvement in funded status was seen from 76% to 87% in aggregate over 2013, say Jaugietis and Gong (see “Time Is Ripe for Pension Strategy Changes”).
The authors note that while these corporations saw an improved pension position, responses to this improvement varied from company to company. For example, when it comes to asset allocation, only one of these 19 companies, Ford, shifted more than 3% of its assets to liability-hedging fixed income thus far in 2014. Ford has also stated an intention to shift to 80% fixed income over the next few years.
Another one of these 19 companies, HP, took a different route, say the authors. That company chose to “re-risk” its pension plan, moving from a mix of 40% return-seeking investments and 60% fixed income to a mix of 55% return-seeking investments and 45% fixed income.
The authors of the analysis also note that the 19 companies that make up this “club” also funded their plans differently from one another. Ford paid $5 billion into pension plans in 2013 and intends to contribute an additional $2 billion in 2014. By contrast, HP contributed nothing to its pension plans in 2013 and intends to contribute nothing this year as well. The authors conclude that HP is using returns from its pension assets to close their funding shortfall, while Ford has chosen a different route.
With regard to tracking of the Barclays-Russell LDI Index, the analysis shows that February saw an increase in typical pension liabilities between 1% and 2%, with the increase being the largest for plans with longer duration investments. This follows fairly significant liability increases in January, meaning that the liabilities of plans with longer durations may be as much as 6% higher than at the start of the year.