The funded status fell 2.9 percentage points to 68.7%, the lowest level since BNY Mellon began tracking this information in December 2007, according to the BNY Mellon Pension Summary Report for July 2012.
The decrease was driven by a sharp spike in liabilities, which increased 5.5%, outpacing a 1.2% gain in assets at the typical corporate plan. The funded status of the typical plan has now fallen 3.7 percentage points during 2012.
The rise in liabilities resulted from the 34 basis-point drop in the Aa corporate discount rate to 3.64%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities.
Assets in the typical plan benefited from rising equity markets, including a 1% gain in U.S. equity markets and a 1.1% increase in international developed markets.
“The continuing uncertainty regarding the euro zone and lack of a coordinated response to the debt issues in Europe continue to send investors into bonds that are perceived to be a safe haven,” said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the BNY Mellon Investment Strategy and Solutions Group (a division of The Bank of New York Mellon). “As long this uncertainty remains, we expect to see very low interest rates, which will continue to pressure plan sponsors.”
Saef also noted that portfolios for plan sponsors have performed well, with assets rising more than 7% during the first seven months of the year for the typical U.S. corporate plan. However, he added, “Hitting a return target isn’t enough these days if you're not keeping up with the growth in liabilities.”