ISSG researchers note that for April, the funded status of the typical U.S. corporate DB pension plan declined 1.1% to reach 91% as projected liabilities increased faster than assets for the second consecutive month.
In addition, the BNY Mellon Institutional Scorecard for April finds that liabilities increased 2.1%, outpacing the 0.9% increase in assets experienced by the typical corporate plan during the month. Year to date, the scorecard finds that the funded status of corporate plans is down 4.2%.
Public DB plans met their target returns, while endowments and foundations posted negative real returns, according to BNY Mellon ISSG.
“Significant declines by small-cap stocks and private equity were the primary reason that corporate plan returns did not keep pace with the liabilities,” says Andrew D. Wozniak, head of fiduciary solutions, ISSG, based in New York. “With the funded status of corporate plans down from their high of 95.2% in December 2013, many plan sponsors continue to maintain high allocations to equities as they wait for a better environment to reduce their exposure to market risk.”
Todd W. Wakefield, a lead portfolio manager at The Boston Company Asset Management, attributes the fall in small-cap stocks to the sharp rotation away from growth and towards value stocks during April. “Small caps have a disproportionate amount of growth stocks in their index,” he explains.
The increase in liabilities for corporate plans in April was due to a 13-basis-point decline in the Aa corporate discount rate, which reached 4.43%, according to the ISSG research. Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities.
On the public side, DB plans met their target as assets led by large-cap equities and real estate investment trusts in April rose 0.6%. Year over year, public plans are ahead of their target by 1.8%, according to ISSG.
For endowments and foundations, ISSG finds that the real return in April was a negative 0.2%, missing the target for spending plus inflation. This underperformance was driven largely by exposure to private equity, which declined 2.3% in April, the second consecutive month of negative performance for the asset class, according to ISSG. Year over year, foundations and endowments are ahead of their target by 2.2%.
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon, or BNY Mellon. The Boston Company Asset Management, LLC, a BNY Mellon Investment Management boutique, provides active equity investment management services for corporate, public, union-sponsored and jointly trusteed retirement plans.