The decline follows a more than 13 percentage point drop in November (see Corporate Pensions Slammed by Downturn in November ). According to a BNY press release, in 2008, the funded status for the typical U.S. corporate plan fell 31.5 percentage points.
BNY said the two double-digit declines resulted primarily from falling rates of longer-term high grade corporate bonds.
“The Fed’s drive to bring down interest rates to help the economy has had the collateral effect of increasing the liabilities of typical U.S. corporate pension plans,” said Peter Austin, executive director of BNY Mellon Pension Services, in the press release. “Liabilities rose 20.3% in December as corporate bond yields dropped by 125 basis points. Small solace to plan sponsors was a year-end stock market rally that boosted asset returns by 3.2% in December. The combination of falling stocks and rising liabilities throughout 2008, reminiscent of the ‘perfect storm’ of 2001-2003, resulted in one of the worst years in memory.”
Looking ahead, Austin said BNY foresees an increase in Treasury yields during 2009, and a continued narrowing of corporate spreads, led by the demand of plan sponsors to use long corporate bonds as a pension liability hedge.