Pension Funding Levels Strengthen

In the brief, titled “Tis the Season Not to Trade Long Bonds (If You Can Help It),” authors Marty Jaugietis, managing director of Russell’s LDI Solutions, and Calvin Gong, an LDI portfolio manager for Russell, use hypothetical plan analysis to demonstrate how the funded ratios of pension plans have been impacted by factors such as investment markets and interest rates.

For open plans of a 12-year duration, the analysis saw funded ratios rising to between 85% and 90% in October, while the funded ratios of closed plans of an eight-year duration rose to just over 80% in the same time period. These are both increases from an earlier analysis in December 2011, which had both ratios at just under 75%.

The brief shows that pension plan funding levels improved between one and two percentage points during October. The effective interest rate fell by 13 basis points, increasing the liability of the hypothetical open plan by two percentage points. The authors of the brief say this was more than offset by equity market improvements.

Funding levels for pension plans are 12 percentage points higher since the start of 2013, according to the brief. The authors of the brief say they are also seeing some plans wanting to de-risk in light of these improved funding levels, but caution that plan sponsors need to keep seasonal liquidity levels in mind. They note that a reduction in the volume of corporate bond trading in December may not support heavy transaction activity.

The full text of the research brief, including relevant graphs and charts, can be downloaded here.