DB Plan Liabilities Declined in June

July 2, 2014 (PLANSPONSOR.com) – The funded status of corporate defined benefit (DB) plans in the United States increased to 92% during June, with liabilities decreasing 0.2% during the month.

A recent analysis by the BNY Mellon Investment Strategy and Solutions Group (ISSG) shows that the funded status of the typical U.S. corporate pension plan increased 1.4 percentage points in June, driven by rising asset values.

The BNY Mellon Institutional Scorecard for June notes assets at the typical corporate plan rose 1.4%. Year to date, the funded status of corporate plans is down 3.2 percentage points, according to the scorecard.

“Corporate plans also benefited from a slight rise in interest rates, which reduced liabilities,” says Andrew D. Wozniak, head of fiduciary solutions, ISSG, based in New York. “June ended a string of three consecutive months of falling rates, which had been driving liabilities higher.”

Public DB plans, endowments and foundations also benefited from strong asset returns and exceeded their return targets, according to the ISSG analysis. For endowments and foundations, the real return in June was 1%, exceeding the target for spending plus inflation. This outperformance was driven largely by their exposure to private equity, which accounts for approximately 15% of the typical portfolio for endowments and foundations, according to ISSG. Year over year, foundations and endowments are ahead of their target by 8.2%.

“Equities have continued rallying since April as economic data appears to indicate strengthening global growth,” says Wozniak. “If the funded status continues to rise, we expect more plans to implement strategies that better insulate them from future market volatility.”

The decrease in liabilities for corporate plans in June was due to a four-basis-point increase in the Aa corporate discount rate, which reached 4.32%. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.

Public DB plans in June exceeded their target by 1% as assets led by small cap equities and private equity rose. Year over year, public plans are exceeding their targets by 9%, ISSG says.

The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.