Higher Rates Help Give Plans December and Year-End Boost

January 7, 2008 (PLANSPONSOR.com) - The typical U.S. pension plan finished December and the year 2007 in better shape than at the start of both periods, thanks to the gift of higher December interest rates.

A BNY Mellon Asset Management news release said the typical pension plan improved its status during December by 0.2%. Higher rates helped to drive down the value of liabilities 0.6%, which more than offset the 0.4% asset decline within the typical U.S. plan, according to the latest data from the BNY Mellon Pension Liability Indexes.

According to the release, for the year, the typical moderate risk pension plan in the U.S. improved its funded status 4.5%, as assets increased 6.6% and liabilities rose 2.1%.

BNY Mellon Asset Management said the indexes will now start highlighting the results on a “reporting basis,” although the firm will continue to track the results on a “market value basis.”

The “reporting basis” is designed to reflect new funding rules adopted by the U.S. Treasury Department and financial reporting guidelines implemented in 2007 by the Financial Accounting Standards Board (FASB). The “market value basis” estimates the market value of liabilities, which is especially relevant for frozen and terminating plans.

“The 2007 liability return on a reporting basis at 2.1% is quite a bit less than the 2007 liability return on a market value basis at 9.3%” said Peter Austin, executive director of BNY Mellon Pension Services, in the announcement. “This reflects the 60-plus basis point widening in corporate yield spreads.  Treasury yields declined about 30 basis points, while long high-grade corporate yields increased more than 30 basis points during the year.”