Solvency funding for DB pension plans is up slightly, mainly due to strong equity returns in the third quarter, according to a new survey from Aon Hewitt. However, Thomas Ault, an associate partner in Aon Hewitt’s retirement practice, says this slight improvement doesn’t leave the typical plan any further ahead than it was in 2010, “despite the significant cash contributions that have typically been made.”
The median solvency funded ratio of the large sample of pension plans polled has increased from 66% at the end of June 2012 to 68% at the end of September 2012.
As of September 30, 97% of the sample had a solvency deficiency. (The solvency funded ratio measures the financial health of a DB pension plan by comparing the number of assets to total pension liabilities in the event of a plan termination.) Plan assets have increased by 17% since Jan. 1, 2010, but liabilities have increased 48% within the same time period.
Impact of de-risking
Plans that implemented de-risking strategies—such as increasing investment in bonds from 40% to 60% and investing in long bonds instead of universe bonds to better match liabilities—back in Jan. 1, 2011, have done better than the typical plan, Aon Hewitt has found.
The de-risked plan would have experienced a 77% solvency ratio as at Sept. 30, 2012, as opposed to 68% for the median plan.