This year has been fair to defined benefit (DB) plan sponsors in the U.S. and U.K. so far, where the funded status of plans are improving or at least holding steady.
Based on the latest figures from Mercer, the funded status of U.S. pension plans sponsored by the S&P1500 companies was unchanged between January and February, at 83%.
While this stability reflects relatively benign market conditions in February, plan sponsors continue to work towards adopting investment strategies that are more closely linked to their liabilities, explains Mercer. Also, new disclosure rules from the Financial Accounting Standards Board will require plan sponsors to provide more detail and descriptive information about their pension plan asset allocations and investment strategies. Previous asset allocation disclosures provided only a split of assets among the broad categories of equities, fixed income, real estate or other.
“As companies employ more sophisticated investment strategies, such as interest rate swaps or synthetic long duration bonds, the enhanced disclosures could give analysts a better indication of the degree to which a plan sponsor is hedging pension plan risk,” says Adrian Hartshorn, a partner in Mercer’s financial strategy group. “Greater risk management increases the stability of the plan sponsor’s earnings, which may be considered by analysts in their share price valuations.”
Meanwhile, the aggregate funding position of the 7,400 DB funds monitored by the U.K.’s Pension Protection Fund (PPF) improved to a deficit of £15.1 billion (C$23.2 billion) in February, up from a deficit of £51.9 billion at the end of January.
“During the month of February, there was a 2.5% increase in assets due to rising U.K. and global equities,” said the PPF in a statement. “Meanwhile, the change in gilt yields led to a 2% decrease in liabilities. The FTSE All Share Index rose by 3.9% over February 2010.”
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