August 03, 2012

Funded Status of U.S. Corporate Pensions Falls to Lowest Recorded Level in July, According to BNY Mellon

Level Declines to 68.7 Percent as Liabilities Rise Sharply

NEW YORK, August 3, 2012 — The funded status of the typical U.S. corporate pension plan in July fell 2.9 percentage points to 68.7 percent, the lowest level since BNY Mellon began tracking this information in December 2007. 

The decrease was driven by a sharp spike in liabilities, which increased 5.5 percent, outpacing a 1.2 percent gain in assets at the typical corporate plan, according to the BNY Mellon Pension Summary Report for July 2012. The funded status of the typical plan has now fallen 3.7 percentage points during 2012.

The rise in liabilities resulted from the 34 basis-point drop in the Aa corporate discount rate to 3.64 percent.  Plan liabilities are calculated using the yields of long-term investment grade bonds.  Lower yields on these bonds result in higher liabilities.

Assets in the typical plan benefit from rising equity markets, including a one percent gain in U.S. equity markets and a 1.1 percent increase in international developed markets, according to BNY Mellon.

"The continuing uncertainty regarding the euro zone and lack of a coordinated response to the debt issues in Europe continue to send investors into bonds that are perceived to be a safe haven," said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the BNY Mellon Investment Strategy and Solutions Group (a division of The Bank of New York Mellon).  As long this uncertainty remains, we expect to see very low interest rates, which will continue to pressure plan sponsors."

Saef also noted that portfolios for plan sponsors have performed well, with assets rising more than seven percent during the first seven months of the year for the typical U.S. corporate plan.  However, he added, "Hitting a return target isn't enough these days if you're not keeping up with the growth in liabilities."

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