Liabilities Rise and Assets Fall for Second Month in Row
BOSTON, September 7, 2011 — The funded status of the typical U.S. corporate pension plan in August fell 5.6 percentage points to 78.0 percent as pension plans were affected by both falling assets and increasing liabilities for the second month in a row, according to monthly statistics published by BNY Mellon Asset Management.
The typical plan is now at its lowest funding level since September 2010, according to the BNY Mellon Pension Summary Report for August.
Assets for the typical plan fell 3.3 percent, reflecting declines in U.S. and global equities, according to BNY Mellon. Liabilities rose 3.6 percent, as the Aa corporate discount rate decreased 23 basis points to 4.94 percent, the report said. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.
"Growing concerns over the government's ability to stimulate the economy and deal with the deficit in the U.S. and the sovereign debt issues in Europe have both contributed to a tough situation for sponsors of U.S. corporate pension plans," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. "Growing pessimism about the ability to surmount these challenges in August led investors from equities to Treasuries and other asset classes believed to be less risky. Fortunately, spreads between corporate bonds and Treasuries widened by 35 basis points, saving plan sponsors from an even worse decline."
However, Austin noted that the extreme pessimism appears to have abated somewhat during the second half of August, as equities mounted a tepid recovery. He said, "It remains to be seen whether concerns about the global economic malaise and the effectiveness of government policy will diminish sufficiently to allow the funded status of U.S. corporate pension plans to recover. Given the prospect of lower interest rates, recovery likely will need to come from asset returns."
BNY Mellon Asset Management is one of the world's leading asset management organizations, encompassing BNY Mellon's affiliated investment management firms and global distribution companies. Information about BNY Mellon Asset Management can be found at www.bnymellonam.com.
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