In the first half of 2013, rates have climbed and equities have taken off. As a result, the value of pension liabilities has declined while pension assets have mostly increased in value according to a new report from Martin Bernstein of Citigroup. Bernstein notes that pension funding has improved in the first half check up. Although, pensions still have a lot of problems, this is certainly good news.

Pension funding first half check up

  • We estimate that the aggregate funded ratio of US corporate defined benefit pension plans has improved from approximately 0.77 at year-end to 0.88 as of the end of June.
  • The percentage of Pension funding of assets in fully-funded plans has likely increased from 5% to 16%, and approximately 40% of pension assets are now held in plans that are at least 90% funded.

Evaluating Pension funding Status

In order to estimate changes in pension funded status in aggregate and individually for specific plans, we look at the published asset allocations and liabilities of the largest corporate defined-benefit pension plans. Our database includes almost 500 plans accounting for over $1,750 billion in asset value as of the beginning of the year. We source pension data from published corporate 10-Ks, in which plan sponsors disclose the value and gross allocation of pension assets as well as the value of plan liabilities (PBO).

Pension assets are broken down into four broad asset classes, for which we use indexes (in parenthesis, below) to proxy intra-year returns to determine Pension funding:

  1. Equities (S&P 500)
  2. Bonds (A blend of the Citi Broad Investment Grade Index and the Citi Investment Grade Corporate Index)
  3. Real Estate (Dow Jones US Select REIT Index)
  4. Other (HFR Global Hedge Fund Index)

For pension liabilities we use the returns of the Citigroup Pension Liability Index – Intermediate, which has averaged a duration of 14.9 years over the past six months. Starting with year-end data2, we estimate monthly changes to assets and liabilities on a plan-by-plan basis using the asset allocation of each plan and the returns of the proxy indexes. While we assume no rebalancing takes place, running the analysis with constant asset allocations (implying monthly rebalancing of pension assets) did not produce materially different results.

Our analysis does not account for any hedging that plans have implemented, additional contributions from plan sponsors or other actions that pensions or plan sponsors may have taken that could have materially affected their pension performance.

Aggregate Pension funding

In Figure 3, we show month-end estimates of liability and asset values, including the size of the funding gap and funding ratio.

  • We estimate that the funded status for US corporate defined benefit pension plans improved from 77% to 88% over the first six months of the year.
  • The funding gap fell by more than half, from -$540 billion to -$258 billion.
  • Most of the improvement in funded status resulted from declining liability values, as liability returns were approximately -8.4%, outstripping returns on most assets.

Note that this analysis does not include any hedges that pensions have implemented. Asset/liability curve hedges, which typically lengthen the duration of assets, would likely have reduced asset returns and improvements in funded status.

We also do not include extra contributions to plans, which would increase asset values and funded ratios.