Pension Fund Performance Suffered in December

A year-end analysis from BNY Mellon Investment Strategy and Solutions Group (ISSG) finds corporate pension plans, public plans, foundations and endowments all finished 2014 on a weak note.

ISSG says the funded status of the typical U.S. corporate pension plan fell 2.6% to 87.3% in December, as assets fell and liabilities increased. Public defined benefit (DB) plans, endowments and foundations also lost ground during the month, ISSG notes.

Assets decreased 0.4% for the typical corporate plan in December, as liabilities increased 2.5%. The funded status for the typical corporate plan finished 2014 down 7.9% from the December 2013 high of 95.2%, as described in the BNY Mellon Institutional Scorecard. 

ISSG suggests falling international and emerging markets equities accounted for the decline in assets at U.S. corporate plans and public plans, while the declines in private equity and commodities led to negative returns for foundations and endowments. Further, higher liabilities for corporate plans were propelled by a drop in the Aa corporate discount rate, which dropped 14 basis points (bps) to 4.00% over the month. As ISSG explains, plan liabilities are calculated using the yields of long-term investment grade bonds, so lower yields on these bonds result in higher liabilities over time. 

Andrew Wozniak, head of fiduciary solutions for ISSG, notes the decline in interest rates, with the Aa corporate discount rate falling 93 basis points during 2014, was the main driver for the fall in funded status during 2014. Asset gains simply could not keep up with the rise in liabilities, he suggests.

“The falling rates of 2014 erased almost all of the gains in funded status in 2013 that resulted from rising interest rates during that year,” Wozniak concludes.

Public defined benefit plans in December underperformed their targets by 1.8% as assets declined 1.2%, according to the monthly ISSG report. For the full year of 2014, public plans underperformed their return target by 3.0%. For endowments and foundations, the real return in December was negative 1.8% as assets declined 1.4%, ISSG says. For the year, endowments and foundations are behind their inflation plus spending target by 2.7%. 

The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon. More information can be found at www.bnymellon.com.