February Pension Funding Boost Offsets January Declines

According to the BNY Mellon Investment Strategy and Solutions Group (ISSG), the funded status of the typical U.S. corporate pension plan increased 5.1 percentage points in February, reaching 87.5%.

It was the best monthly gain since January 2011. Equity markets bolstered assets and rising interest rates created lower liabilities, resulting in February’s gains offsetting January’s declines.

Assets for the typical U.S. corporate plan rose 2.1%, while U.S. stocks, international developed markets equities, and emerging markets equities all reported gains. Further, liabilities fell 3.9% as the Aa corporate discount rate reached 3.84%, up 28 basis points. Plan liabilities are calculated using the yields of long-term investment grade bonds, and higher yields on these bonds result in lower liabilities.

“The funded status for U.S. corporate plans is now in positive territory for 2015,” says Andrew D. Wozniak, head of fiduciary solutions, ISSG. “February capped the best three-month period for job growth in the U.S. in the last 17 years, and the strengthening employment situation was one of the important drivers of interest rates in February.”

ISSG reports public plans, endowments, and foundations had their best increases relative to their targets since February 2014. Public defined benefit plans beat their targets by 2.4% as assets returned to 3%. Year over year, they remain below their return target by 1.9%. For endowments and foundations, the real return was 3% for the month as assets returned 3%. Year over year, they are behind their inflation plus spending target by 0.9%.

Public defined benefit plans improved due to their allocations to U.S. Large cap equities and high yield fixed income, while the positive returns of endowments and foundations were supported by private equity and emerging markets equities.