Pension Funding Gap Narrows in August

September 3, 2009 ( - Rising stock markets around the world outpaced an increase in pension liabilities in the so-called "typical" U.S. corporate pension plan last month.

Assets for the typical moderate risk portfolio increased 2.7% during the month, outpacing a 2.1% rise in liabilities, according to the BNY Mellon.   In announcing the results, BNY Mellon noted that plan liabilities are calculated using the discount rate of long-term investment grade corporate bonds, and that lower yields on these bonds result in higher liabilities.

The combination resulted in an improvement of the funded status of the typical plan by 0.5 percentage points to 79.7% at August’s end, up from 79.2% the month before, according to monthly statistics published by BNY Mellon Asset Management.

Moreover, for the year, through August 31, the funding ratio for the typical plan is now up 5.8 percentage points, as represented by the BNY Mellon Pension Liability Index.

“Six straight months of improving stock markets have bolstered the assets of these plans, which is good news given the corresponding decline in Aa corporate bond yields,” said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management.    “The long Aa corporate bond discount rate dropped from 5.88% at the end of July to 5.75% at the end of August, which is the lowest level since February 2007.”

Steady Declines

“We have not been surprised by the steady decline since March in the long Aa corporate bond yield.   The calming of the markets combined with the very attractive corporate bond nominal yields have resulted in significant demand for high quality bonds,” Austin said in a press relase.    “Much of this demand is generated by corporate pension plan sponsors, who are seeking to better manage funding risk and reduce financial statement volatility. As spreads between corporate bonds and Treasuries approach more historical levels, pension plans must weigh the merits of adopting a defensive posture that would limit the impact of further declines in these yields against a strategy of increasing their allocations to equities in the hope of improving their funding ratios.”

BNY Mellon Asset Management is the umbrella organization for The Bank of New York Mellon Corporation’s affiliated investment management firms and global distribution companies.