Pension funding ratios decreased in the first quarter of 2016 from 83.1% to 78.8%, according to Legal & General Investment Management America Inc.’s (LGIMA) Pension Fiscal Fitness Monitor. 

The Pension Fiscal Fitness Monitor, which is a quarterly estimate of the change in health of a typical U.S. corporate defined benefit pension plan, showed that funded ratios decreased over the quarter as pension liabilities grew more than assets. 

A decline in interest rates was the main reason for the decrease in funding ratio, according to LGIMA’s Head of Solutions Strategy Don Andrews. “Alternatively, funding ratios for plans that have previously implemented liability benchmarking and/or completion management strategies fell only about 0.6% during the quarter.”

The pension funding status of the nation’s largest corporate plan sponsors finished 2015 at 82%, unchanged from the end of 2014, mostly due to an increase in interest rates offset by a weak global stock market, according to Willis Towers Watson (see “Boosting Pension Plan Funding in 2016”). 

LGIMA also found that global equity markets increased 0.4% and the S&P 500 increased 1.3% in Q1 2016. Plan discount rates fell 42 basis points, as Treasury rates decreased 44 basis points and credit spreads widened 2 basis points. Overall liabilities for the average plan were up 7.1%, while plan assets with a traditional “60/40” asset allocation only increased 1.6%, resulting in a funding ratio decrease of 4.3%.

Andrews adds that recent volatility in equity and fixed-income markets highlights the importance of having a comprehensive de-risking strategy. 

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 60% global equity/40% aggregate bond (“60/40”) investment strategy, and pulls data from LGIMA research, Bank of America Merrill Lynch and Bloomberg.

NEXT: Pension Funding Status from Mercer

Not all segments of the pension market were impacted the same during the first quarter. The estimated aggregate funding level of pension plans sponsored by S&P 1500 companies actually increased by one point to 79%, “as positive equity markets more than offset the decrease in discount rates,” Mercer reports. 

As of March 31, the estimated aggregate deficit of $492 billion for these companies is now $88 billion more than the $404 billion deficit measured at the end of 2015. 

The last month of the quarter shows just how fickle pension funding numbers can be, relative to market returns. The S&P 500 index gained 6.6% and the MSCI EAFE index gained 6.0% in March, yet the typical discount rate for pension plans as measured by the Mercer Yield Curve decreased by 23 basis points, to 3.80%.

“March was a great reminder of how much influence interest rates have over the funded status of pension plans,” says Jim Ritchie, a partner in Mercer’s retirement business. “Despite strong equity markets in March, the S&P 1500 pension funded status only increased by one point because of an approximately 20 basis point decrease in interest rates. As rates continue to stay at historic lows, more and more plan sponsors are considering moving toward glide-path and other liability-driven investment strategies and abandoning the hope that long-term interest rates will rise in the near future.”

NEXT: Report From Wilshire Consulting

Other sources of pension funding data published similar analysis, including Wilshire Consulting. 

According to Wilshire's research, the aggregate funded ratio for U.S. corporate pension plans increased by 2.1% to 80% for the month of March 2016, but was down 2.6% for the first quarter from 82.6% at the end of 2015, according to Wilshire Consulting. 

“The March rise in funding levels was driven by a 4.8% increase in asset values thanks to a 7% to 8% surge in global stocks, but that was partially offset by a 2.1% increase in liability values,” says Ned McGuire, vice president and member of the Pension Risk Solutions Group of Wilshire Consulting. “The liability result is due to declining corporate bond yields used to value pension liabilities.”

-Corie Hengst