Corporate Bond Yields Keep Pension Funding Down

September 14, 2009 ( - Strong portfolio returns could not offset a large decline in corporate bond yields in August, pushing the Towers Perrin Pension Index down 1%, to 66.9, according to the firm's latest Capital Market Update (CMU).

The index reflects the asset/liability performance of a hypothetical benchmark pension plan, and the benchmark investment portfolio used in the index realized a 2.8% return for August and is now up 12.5% for the first eight months of 2009.  However, the index liability measure (based on projected benefit obligations) was up 3.9% in August and 10.3% for the year to date, according to a Towers Perrin press release.

The current index value of 66.9 remains up 1.4% from its 66.0 value at the start of 2009, but is down 23.3% from its August 2008 level of 87.2.

In addition, Towers Perrin’s tracking of the aggregated pension financial results for a group of 300 large U.S. companies, the TP 300, finds the aggregate unfunded amount rising from $339 billion at the start of the fiscal year to $360 billion as of August 31, 2009. The announcement said this change reflects the net impact of a number of offsetting factors: a significant decline in discount rates pushing up liability values, strong returns pushing up (the relatively smaller) asset amounts, and a high rate of expected plan contributions, significantly in excess of the cost of benefits earned during the year.

The firm noted that the year-to-date results for aggregate funded status include about 14% of companies with measurement dates before year-end 2008 (e.g., June 30 or September 30).  For these companies, all or most of the losses experienced in the fall 2008 capital market meltdown are included in their estimated year-to-date results. 

The early measuring companies experienced an estimated $30 billion decline in funded position since the close of their 2008 fiscal years, while the larger group of companies with measurement dates on or around 12/31/2008 had an estimated $9 billion improvement in aggregate funded position.

The August 2009 Capital Markets Update is here .