Lower Rates Send Liabilities Higher at Year End
BOSTON, January 4, 2012 — A sharp bounce in liabilities in December resulted in a 2.7 percentage point decrease in the funded status of the typical U.S. corporate pension plan, according to BNY Mellon Asset Management. For the year, the funded status declined 12.7 percentage points to 72.4 percent, according to the BNY Mellon Pension Summary Report for December 2011.
The decline in funded status was the second biggest calendar year decline since BNY Mellon began tracking this data in 2005. The large decline in 2011 was due to the liability discount rate reaching a new historic low, 4.36 percent, surpassing the record set in September 2011, according to the report. BNY Mellon noted that assets for the typical plan did increase 2.7 percent in 2011, but liabilities increased much faster, 20 percent, to send funding levels lower for the year.
The rise in liabilities during December was driven by a decrease in the Aa corporate discount rate, which fell 30 basis points to 4.36 percent, according to BNY Mellon. Plan liabilities increased 4.6 percent in December, overshadowing a 0.8 percent increase in plan assets, the report said. The plan assets increased as a result of a slight gain in U.S. equity markets, BNY Mellon said.
Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.
"The continuing uncertainty regarding the prospects for a U.S. economic recovery and the ongoing European debt crisis drove investors back into bonds during December, which sent interest rates lower," said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the Investment Strategy & Solutions Group (a division of The Bank of New York Mellon). "We expect continuing volatility until investors believe the recovery in the U.S. is sustainable and some resolution is reached in Europe."
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