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Funded status of US corporate pensions up to 91.8 per cent in October

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Strong equity and fixed income returns in October contributed to rising assets for corporate defined benefit plans, public defined benefit plans, and endowments and foundations in the US, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).  

The funded status of the typical US corporate plan rose 0.8 percentage points to 91.8 per cent in October, ISSG says.
 
Corporate plans led the three groups as public equities outperformed alternatives in October. However, public pension plans and endowments and foundations in the US also exceeded their targets during the month.
 
"Corporate plans continue to benefit from rising equity markets, although Aa corporate bond yields fell for the first time since July, leading to higher liabilities," says Jeffrey B Saef, managing director, BNY Mellon, and head of ISSG.  "Still, assets for corporate plans rose 2.6 per cent, outpacing the 1.7 per cent increase in liabilities.  With the funded status of these plans continuing to move higher, we see growing interest from plan sponsors in strategies that can lower exposure to market volatility."
 
On the liability side for corporate plans, the Aa corporate discount rate in October 2013 fell 11 basis points to 4.70 per cent, leading to the higher liabilities.  However, the rate remains 98 basis points higher than in October 2012.  Year to date, the funded ratio for corporate pension plans is up 14.7 percentage points, according to the BNY Mellon Institutional Scorecard.  
 
Plan liabilities are calculated using the yields of long-term investment grade bonds.  Lower yields on these bonds result in higher liabilities.
 
On the public side, the typical defined benefit plan in October posted a 1.8 per cent excess return over its annualised 7.5 per cent return target, ISSG says. Public plan assets must earn at least 0.6 per cent each month to keep pace with the 7.5 per cent annual target.
 
For endowments and foundations, the net return over spending and inflation was 1.4 per cent as plan assets increased 1.9 per cent. Endowments and foundations have benefited from low inflation for the past year, but ISSG notes that an increase from current levels could make it more difficult for them to achieve their return targets.

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