This improvement of 1.3 percentage points is the highest level since September 2008, as rising equity markets drove assets higher and rising interest rates lowered liabilities, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
Research from ISSG shows that public defined plans, endowments and foundations benefited in December from the equity rally, as well as their holdings in private equity.
For U.S. corporate plans, ISSG research also indicates that assets increased 0.8% and that liabilities fell 0.6%. The decline in liabilities was due to an eight-basis-point increase in the Aa corporate discount rate to 4.93%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
“December capped off a strong year as the funded status of the typical U.S. corporate plan increased more than 18 percentage points in 2013,” says Jeffrey B. Saef, managing director of BNY Mellon and head of ISSG, based in New York. “It was the best of all worlds as rising equities benefited the asset side, while the rising discount rate resulted in lower liabilities. These trends have encouraged a growing number of plan sponsors to reduce their exposure to market volatility.”
On the public side, the typical defined benefit plan in December achieved excess return of 0.4% over its annualized 7.5% return target, according to ISSG. Public plan assets must earn at least 0.6% each month to keep pace with the 7.5% annual target.
For endowments and foundations, ISSG research shows that the net return over spending and inflation was 0.7% as plan assets increased 1.1%. Endowments and foundations continue to be aided by the low-inflation environment, which makes it easier for them to achieve their goals.
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon (BNY Mellon). BNY Mellon provides financial services for institutions, corporations or individual investors, as well as investment management and investment services.
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