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Jun 03

Pension funded status slips

Posted by Stephen Taub in Riskpensionspension fundsCashCareers/ManagementBNY Mellon Pension ServicesBNY Mellon Asset Management

Stephen Taub

The funded status of pension funds slipped for the first time in nine months.

The funded status of the typical U.S. corporate pension plan in May fell 2.3 percentage points to 86.9 percent, according to monthly statistics published by BNY Mellon Asset Management. This also erased nearly half of the gains achieved since the beginning of the year.    

"The sudden reversal in May reflected the impact of lower Treasury yields as investor concern grew regarding the European sovereign debt situation," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management.  

The decline in the funded ratio was driven by falling interest rates, as the Aa corporate discount rate dropped 16 basis points to 5.34 percent, according to the BNY Mellon Pension Summary Report for May 2011. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds.  Lower yields on these bonds result in higher liabilities.

In addition, assets in the typical corporate plan in May fell 0.3 percent, as the US equity markets lost 1.1 percent and international developed stock markets dipped 3 percent, according to the report.

"The results in May reinforced the message that serious economic challenges continue to exist in the U.S. and  global markets, which may negatively impact plan funded status," Austin said.  "With inflation becoming less of a near-term concern, we expect that some plan sponsors will revisit their asset allocation strategy and consider whether now is the time to preserve some of the funding gains achieved between September 2010 and April 2011."

In the first four months of the year, the funding ratio for the typical corporate plan improved 4.9 percentage points.

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