Liability Decrease Drives Increase in Pension Funded Status

Public pensions and foundations and endowments suffered from low returns.

The funded status of the typical U.S. corporate pension plan increased 1.5 percentage points in June to 87.8%, according to the BNY Mellon Investment Strategy and Solutions Group (ISSG).                    

Liabilities declined more rapidly than assets during the month. The June BNY Mellon Institutional Scorecard is the first to reflect a realignment in the December 2014 funded status for the typical U.S. corporate plan resulting from recent changes in mortality tables produced by the Society of Actuaries to estimate life expectancies. These longer life expectancy assumptions caused a 5-percentage-point reduction in the December 2014 funded status, which was then carried forward, ISSG said.                   

“We expect additional revisions as more companies adopt these changes in the mortality tables,” says Andrew D. Wozniak, head of fiduciary solutions, ISSG.

For the typical U.S. corporate plan, assets in June fell 2.1%, while liabilities declined 3.8% as the Aa corporate discount rate rose 29 basis points (bps) to 4.49%. This was the fifth consecutive month for a rise in the discount rate and the third consecutive month in which most asset classes outperformed the liability at the typical corporate plan, ISSG said.

“The significant rise in the Aa corporate discount rate in June continued the momentum toward lower liabilities,” says Wozniak. “Discounting the impact of the new mortality tables, the funded status of typical corporate plans continues to improve because of the declining liabilities.”

Public defined benefit (DB) plans in June missed their return target by 2.3% as assets declined 1.7%, according to the monthly report. Year over year, public plans are 6.8% below their annual return target, ISSG said.

For endowments and foundations, the real return in June was -2.0% as assets fell 1.3%. Year over year, endowments and foundations are behind their inflation plus spending target by 5.6%.