The funded status of the typical US corporate pension plan in July fell 4.9 percentage points to 83.6 per cent, the worst level since the beginning of the year and the lowest funded status since November 2010, according to monthly statistics published by BNY Mellon Asset Management.
Pension plans were hit by both increasing liabilities and falling assets, with the most significant impact coming from a rally in long corporate bonds. Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management, attributed the rally to increased demand for US Treasuries, reflecting the instability of the US and European economies and investors’ flight to quality.
Liabilities increased 5.2 per cent as the Aa corporate discount rate decreased 36 basis points to 5.17 per cent, according to the BNY Mellon Pension Summary Report for July. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.
Assets for the typical plan fell 0.7 per cent, reflecting declines in US and global equities, the report notes.
"Falling interest rates had a severe impact on the funded status of the typical corporate plan," says Austin. "As a result of the rate decline, corporate plans gave up all of the gains they had achieved in 2011 and finished July 1.5 percentage points lower than they were at the beginning of the year."
Austin believes the debt ceiling issue and the growing focus on the US budget are making it more difficult for plan sponsors to manage the volatility of funding levels. He says: "Plans that hedged against falling rates through liability driven investment strategies were most successful in preserving their funded status during July."