US Pension Funding Ratios Plummet in Second Quarter; Third Largest Decline in 20 Years

CHICAGO, July 6 /PRNewswire/ -- Legal & General Investment Management America (LGIMA) announced today that its inaugural Pension Fiscal Fitness Monitor, a quarterly estimate of the overall health of a typical US defined benefit pension plan, found that pension ratios dropped 15 percent in the second quarter of 2010. The drop was the third largest decline in the last 20 years.

The Pension Fiscal Fitness Monitor showed the decline in funding ratios came from a mixture of equity market losses, and lower bond yields. A sell-off in risky assets drove global equity markets lower – the S&P was down 11 percent – leading the average pension investment strategy to drop 6 percent for the quarter. At the same time, the flight-to-quality drove high quality bond prices up and yields lower. This fall in yields resulted in pension discount rates falling 50 basis points from 6.1 to 5.6 percent, increasing the present value of a typical pension liability profile by approximately 10 percent.

LGIMA's Head of US Pension Solutions, Aaron Meder said: "In the last quarter, pension funds faced an extremely difficult market scenario – the combination of unfavorable movement in equity and bond markets led to one of the worst periods in recent memory.

Meder said plan sponsors should react to the results by measuring the amount of risk attributable to interest rate, credit spread and equity markets, determining the return expected for each, and readjusting their portfolios so the amount of risk taken matches the expected return.

The launch of the Pension Fiscal Fitness Monitor is part of LGIMA's increasing educational effort in the US pension solutions market. It will be issued quarterly going forward.

The Pension Fiscal Fitness Monitor assumes a typical liability profile and 65 percent equity / 35 percent aggregate bond ("65/35") investment strategy, and incorporates data from LGIMA research and Bank of America Merrill Lynch and Bloomberg data.

SOURCE Legal & General Investment Management America