Articles | May 1, 2023

Model Pension Plan’s Funded Status Continues to Rise

During the first quarter (Q1) of 2023, the funded status of the model pension plan examined in each issue of Prism rose by 1 percentage point, to 107 percent, as illustrated in the graph below.

This increase in funded status is attributable to a 6 percent increase in assets, partially offset by a 5 percent increase in liabilities.

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Change in Assets,1 Liabilities and Funded Ratio2

Change in Assets, Liabilities and Funded Ratio

The model plan’s portfolio has a simple, passively invested asset allocation of 45 percent to domestic equities, 15 percent to international equities and 40 percent to global bonds.

2 This is the ratio of a defined benefit (DB) plan’s assets to accrued liabilities. The funded ratio data in the graph is the ratio on the last day of each quarter. In May 2022 (after publication of the Q1 2022 Prism), the funded percentage for the model DB plan was reset as of January 1, 2022 to reflect the average actual funded percentage of large pension plans.

Source: Prism Review of First Quarter 2023

Aspects of investment performance that contributed to the model plan’s rise in asset value

U.S. equity and fixed income both posted single-digit returns during Q1. U.S. equity markets were positive during a volatile quarter that was dominated by a regional bank crisis and investor expectations regarding whether Federal Reserve rate increases were ending.

Developed international and emerging market equities also posted positive single-digit returns during the quarter, with developed international stocks outperforming both U.S. and emerging market stocks. A modestly weakening U.S. dollar during the quarter provided a further tailwind for international markets.

Fixed income returns were positive in Q1 both domestically and internationally with interest rates moderating somewhat.

Examine your own DB plan’s experience

Plan sponsors should examine changes in their own DB plans’ assets, liabilities and funded ratios from the vantage point of both accounting and funding metrics.

We can help employers project their DB plans’ funded ratios with a complete view of the range of a plan’s possible future statuses, presenting early warning signs of potential challenges.

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The information and opinions herein provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This article and the data and analysis herein is intended for general education only and not as investment advice. It is not intended for use as a basis for investment decisions, nor should it be construed as advice designed to meet the needs of any particular investor. On all matters involving legal interpretations and regulatory issues, investors should consult legal counsel.

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