Funded status of corporate pension plans in the first quarter of 2020 varied, suggests a recent study which gauges the performance of hypothetical open and frozen pension plans.
More specifically, says NEPC Investment Consulting, the good news: the funded status of plans with higher interest rate hedge ratios and lower equity remained stable in the first quarter. The bad news: the funded status of the typical corporate pension plan in the first quarter “declined sharply as assets took a nosedive amid the COVID-19 pandemic.” How badly did it fall? The study reports that the funded status of a total-return plan dropped by approximately 8.7% in the first quarter.
“Volatility rocked markets in the first quarter as many parts of the world economy ground to an abrupt halt amid stringent restrictions on travel and gatherings in efforts to contain the coronavirus pandemic,” says the analysis. It also noted that equities dropped “precipitously” and that rates fell to “historic lows.”
NEPC says that the funded status of the hypothetical plan that was LDI-focused, which was 75% hedged by the end of the first quarter, was much less volatile since it had less equity allocation and because Treasury bonds rallied. It attributes the bad news for total-return plans to the sell-off of equities that took place due to concerns over the pandemic. It adds that Treasury yield losses were offset by credit spreads for plan liabilities that widened.
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