Funded Status of Corporate Pensions Rose in June

This was the highest level since June 2011, when it was 91.4%, and, year-to-date, the funded ratio is up 13.2 percentage points, BNY Mellon said.

The improvement was driven for the second month in a row by a jump in the Aa corporate discount rate, which drove liabilities sharply lower, according to the “BNY Mellon Pension Summary Report for June 2013.” Liabilities for the typical corporate plan fell 5% as the discount rate on the Aa corporate bonds increased 39 basis points to 4.69%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.

The report also found that assets for the typical corporate plan fell 1.6% as U.S. equity markets had their first losing month this year.

“Investors are growing more confident that the U.S. Federal Reserve is getting ready to taper its easing policies, and this is resulting in higher interest rates, which benefits plans,” said Jeffrey B. Saef, managing director, BNY Mellon Investment Management, and head of the ISSG. “While assets fell slightly in June, the big decline in liabilities more than compensated for the fall in equity values, leading to the improvement in funded status.”

Saef added that many pension plans view a funded status of 90% as a threshold for shifting a portion of their equities into liability-matching assets. “With the funded status at over 89% and yields rising, we would not be surprised to see a growing number of companies moving assets into longer-term corporate bonds.”