Strong Equity Returns Helped Drive July Pension Funding Ratios

August 12, 2005 ( - US pension plan funded ratios moved up dramatically in July, driven by strong equity returns and increasing long bond yields, according to the latest Towers Perrin data.

A news release said that the funded ratio for Towers Perrin’s benchmark plan jumped 3.4%, breaking a four-month-long pattern of decreases. However, the ratio still ended the month at 80.8%, still far below the 85.1% level at the start of the year.

Towers Perrin said that all three equity classes reported strong returns in July with small/mid-cap stocks leading the charge at 5.9% for the month, now also the best-performing class for the year, at 7.2%. July returns were 3.7% for large cap stocks and 3.1% for international stocks.

Meanwhile, according to the Towers Perrin data, increases in fixed-income yields were fairly consistent, generally in the range of 20 to 30 basis points across the board. The 30-year Treasury bond rate ended the month at 4.47% (up 28 basis points), and the Moody’s Aa yield came in at 5.21% (up 25 basis points).

The July yield increases brought negative bond returns. The long bond categories reported the most sizable monthly declines, at roughly 2.5%. Despite this drop, both long bond classes continued to report an over 5% return on a year-to-date basis.

From an asset allocation perspective, the benchmark plan’s 60% equity/40% fixed-income portfolio reported a 2.1% return for July. The more conservative 40% equity portfolio came in at 1.1% for the month, while the more aggressive 80% equity portfolio returned 3%.

Using the Towers Perrin RATE:Link methodology, which matches high-quality corporate rates to projected cash flows, the discount rate for its benchmark plan increased 23 basis points for the month, to 5.45%.

Similar to bond prices, values for pension obligations move in the opposite direction of interest rates. Towers Perrin’s liability index (based on projected benefit obligations) decreased 2.2% in July, reflecting the net impact of interest accumulation and the increase in the discount rate.

The Towers Perrin report is  here .