The BNY Mellon Investment Strategy & Solutions Group (ISSG) finds that the funded status of the typical U.S. corporate pension plan fell 0.4 percentage points in May to 90.6%, a new low for 2014, as liabilities increased faster than assets for the third consecutive month.
“Returns for corporate defined benefit portfolios were nearly 6% through May, which is near their annual targets of 7.5% to 8.0%,” says Andrew D. Wozniak, head of fiduciary solutions, ISSG, based in New York. “While asset returns have been good, they have been offset by declining interest rates, resulting in higher liabilities and lower funded status.”
BNY Mellon’s Institutional Scorecard for May noted liabilities increased 2.3%, outpacing the 1.9% increase in assets at the typical corporate plan during the month. In addition, the funded status of corporate plans, year to date, is down 4.6 percentage points.
Public DB plans, endowments and foundations benefited from strong asset returns and exceeded their return targets, says ISSG.
“Reflecting lackluster U.S. economic growth, interest rates continued their downward slide,” says Wozniak. “Many plan sponsors continue to maintain their equities allocations as they wait for the funded status of corporate plans to increase. Should the funded status rise, we would expect to see more plans reduce their exposure to market risk.”
The increase in liabilities for corporate plans in May was due to a 14-basis-point decline in the Aa corporate discount rate to 4.28%, according to ISSG analysis. Plan liabilities are calculated using the yields of long-term investment grade bonds, with lower yields on these bonds resulting in higher liabilities.
The analysis notes that on the public side, DB plans in May exceeded their target by 1% as assets led by real estate investment trusts (REITs) and emerging markets equities increased. Year over year, public plans exceeded their target by 5%.
For endowments and foundations, the real return in May was 0.5%, according to the ISSG analysis, exceeding the target for spending plus inflation. This was driven largely by their exposure to REITs and U.S. equities, which account for 25% of the typical portfolios for endowments and foundations. The analysis finds that, year over year, foundations and endowments are ahead of their target by 4.5%.