January a Tough Month for Corporate Pensions

The funded status of U.S. corporate pensions fell nearly 5% in January, according to BNY Melon ISSG.

Corporate pension plans, public pension plans, foundations and endowments all missed their return targets for January 2015, according to the BNY Mellon Investment Strategy and Solutions Group (ISSG).  

The funded status of the typical U.S. corporate pension plan declined 4.9% to reach 82.4% by the end of January, propelled downward as the interest rate that determines future liabilities fell to an all-time low, BNY Mellon ISSG says.

The Aa corporate discount rate, which is the key interest rate that determines these liabilities, finished the month at 3.56%, sending projected liabilities 7% higher during the month. While assets for the typical corporate plan increased 1% during the month, this rise was trounced by the massive rise in liabilities, as shown by the BNY Mellon Institutional Scorecard. 

The increase in assets was also tempered by the weaker performance of U.S. equities, which detracted from improvements in other asset classes, ISSG says. The funded status for the typical corporate plan is now down 12.8% from the December 2013 high of 95.2%, according to the scorecard.

Improvements in corporate plan assets in January were driven by gains in fixed income and emerging markets equities. Public plans benefited from the performance of real estate investment trusts and high-yield fixed income, but were hindered by falling values of U.S. equities during the month, ISSG explains.

Endowments and foundations benefited from allocations to emerging markets equity and hedge funds, but also could not keep up with their targets due to weak equity markets in the U.S., ISSG says.

Researchers found a pronounced negative impact on funded status due to the uptake of longer mortality assumptions for pension plan participants and beneficiaries starting in 2015.

“The huge fall in funded status in January combined with the changes in the mortality assumptions that many plans implemented in December 2014 means that many corporate plans saw their funded status drop by more than 10 percentage points in two months,” notes Andrew D. Wozniak, head of fiduciary solutions, ISSG.  “This could be a signal to plans to take on more risk by making such moves as increasing their exposures to equities and alternatives or going to shorter duration fixed income. Shorter duration fixed income may better position them to improve their funding if rates rise.”

ISSG observes public defined benefit plans in January missed their targets by 0.7% as assets declined 0.1%.  Year over year, public plans have underperformed their return target by 1.4%, ISSG said.

For endowments and foundations, the real return in January was negative 0.5%, as assets returned negative 0.3%. Year over year, endowments and foundations are behind their inflation plus spending target by 1.2%, ISSG says.

More information about BNY Mellon ISSG and the BNY Mellon Institutional Scorecard is here