The BNY Mellon Institutional Scorecard for January notes that decreasing interest rates sent liabilities higher and declining stocks sent assets lower for corporate pensions. Public defined benefit plans, endowments and foundations also lost ground in January as a result of the decrease in the equity markets, the ISSG said.
“January’s decline was the largest monthly drop in funded status for U.S. corporate plans since May 2012,” says Andrew D. Wozniak, director of portfolio management and investment strategy for the New York-based ISSG.
For U.S. corporate plans, assets decreased 0.4% and liabilities increased 4.2%, says the ISSG. The increase in liabilities was due to a 27-basis-point decrease in the Aa corporate discount rate, which reached 4.66% during the month. The ISSG notes that plan liabilities are calculated using the yields of long-term investment grade bonds, so lower yields on these bonds result in higher liabilities for pensions.
“Investors became more concerned about global growth fundamentals and the prospects for some emerging markets,” says Wozniak. “As they became more cautious, assets shifted to bonds, sending rates lower.”
On the public side, assets at the typical defined benefit plan in January decreased nearly 1.4%, missing the plans’ average monthly goal of positive 0.6% returns, says the ISSG, adding that year over year, public plans are ahead of their target by 1.5%.
For endowments and foundations, the real return was -1.4%, which was short of the target for spending plus inflation, says the ISSG. Further research by the group finds that assets decreased 0.9%. In addition, investments in real estate and hedge funds helped endowments and foundations to mitigate their assets losses for the month.
Mellon Capital Management, BNY Mellon’s San Francisco-based multi-asset manager, was optimistic about the prospects for improving funded status over the longer term.
“Despite worries about growth and uncertainty in select emerging markets, we expect global growth to improve this year supporting equity prices and providing a headwind for fixed income,” says Vassilis Dagioglu, managing director and head of asset allocation portfolio management at Mellon Capital.
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.
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