Strong equities rally drives improvement
BOSTON, January 5, 2011 — A strong December rally in equities drove the funded status of the typical U.S. corporate pension plan 3.8 percentage points higher to 84.3 percent, their best position since March 2010, according to monthly statistics published by BNY Mellon Asset Management.
While the funded status for pensions was volatile throughout the year, it finished 2010 0.8 percentage points above the December 2009 level of 83.5 percent, according to the BNY Mellon Pension Summary Report for December 2010.
For December, assets for the typical corporate plan increased 3.8 percent, driven by a 6.8 percent rise in U.S. equities and an 8.1 percent boost in international stocks, according to the report. Liabilities fell 0.9 percent in December, due to an increase in bond yields as the Aa corporate discount rate rose from 5.32 percent to 5.43 percent, the report said.
Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Higher yields on these bonds result in lower liabilities.
"The 13.1 percentage point improvement in the typical plan funded status since the end of August is the largest four-month positive change recorded since we began reporting our monthly pension statistics in 2006," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. "The driver of this improvement was U.S. equities, which posted returns in excess of 15 percent during this same period. A 51-basis point increase in the Aa corporate discount rate was an important, but secondary, contributor."
Austin added, "The last two years have been a challenge for pension plan sponsors. In 2009, plan sponsors experienced a steady, significant improvement in funded status as the financial crisis ebbed and confidence returned to the markets. In contrast, 2010 brought tumultuous shifts in funded status due to domestic and global economic challenges. It is unlikely that many sponsors in August expected to end the year with better funding than at the end of 2009. We expect U.S. plan sponsors to continue efforts to closely manage plan funding volatility. In particular, we believe adoption rates for risk reduction programs based on target funding levels will increase, especially in the presence of higher interest rates and strong equity returns."
BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.
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