Corporate pension plans, public pension plans, and endowments and foundations in the U.S. all lost ground financially in August as rising interest rates led to lower values for most asset classes.
Despite the lower asset values, corporate pension plans benefited from the rising rates as they pushed liabilities lower, according to the BNY Mellon Institutional Scorecard. Year to date, the funded ratio for corporate plans was up 11 percentage points, said ISSG.
The decline in liabilities for corporate plans resulted from the 13 basis-point-increase in the Aa corporate discount rate, which increased to 4.78% in August. Plan liabilities were calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
However, the falling liability values from rising bond yields were not enough to offset the decline in assets from struggling U.S. equity markets, according to ISSG. Overall, typical corporate benefit plan assets in August fell 1.6% as liabilities fell 1.5%.
For endowments and foundations, the net return over spending and inflation was -2.1% in August, as plan assets fell 1.5%. Over the past 12 months, plan assets are up 9.4%, beating the spending and inflation target by 2.8%.
For public plans, the excess return over the annualized 7.5% return target was -2.2% in August, as assets fell 1.6% over the month. Public plan assets must earn at least 0.6% each month to keep pace with the 7.5% annual target.
“Market volatility and rising interest rates contributed to lower assets for all three institutional categories,” said Jeffrey B. Saef, managing director of BNY Mellon Investment Management and head of ISSG. “Endowments and foundations benefited from their 22% allocation to hedge funds and absolute return strategies, which helped buoy plan assets. Public plans were hurt by their relatively high allocation to equities, which comprised more than half of the typical U.S. public plan portfolio.”
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.