Sixth month of improvement as plans benefit from equity rally
BOSTON, March 4, 2011 — U.S. corporate pension plans in February continued to benefit from the global stock market rally, as the funded status of the typical corporate plan rose 0.4 percentage points to 88.0 percent, according to monthly statistics published by BNY Mellon Asset Management.
This is the sixth consecutive month of improvement, boosting the funded status for these pension plans to their best levels since October 2008, according to the BNY Mellon Pension Summary Report for February 2011. So far this year, the funded ratio for the typical corporate plan has improved 3.7 percentage points.
In February, assets for the typical corporate pension plan rose 2.3 percent, due to a 3.6 percent improvement in U.S. equities and a 3.3 percent gain in international stocks, according to the report. Liabilities increased 1.7 percent during the month as the Aa corporate discount rate fell 10 basis points to 5.54 percent from 5.64 percent.
Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.
"U.S. corporate pension plans have seen a steady stream of good news since August 2010, when the funded status of these plans was hovering slightly above 70 percent," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. "This rapid improvement in funded status has prompted a growing number of pension sponsors to reassess their asset allocation strategies."
One approach includes reductions in plan funding volatility through higher allocations to fixed income and/or interest rate risk hedging programs, he said. He noted that another approach is continued reliance on return-seeking asset classes, such as equities and alternatives, to drive funding improvement. Regardless of the path taken, Austin said plan sponsors remain acutely aware that pension plans incorporate risks that require constant monitoring and analysis.
Target funding strategies are also gaining traction as plan fiduciaries recognize the need to be prepared to make timely and informed decisions, such as further plan de-risking if interest rates increase and equity markets continue appreciating, he said, adding, "There is a universal desire among plan sponsors to avoid a return to the dark chapter of the past where funding levels deteriorate 15 to 20 percentage points."
BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.
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