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Jan 05
2011

Pension funded status surges to 9-month high

Posted by Stephen Taub in pensionsinvestmentsinvestment grade bondsequitiesCashBNY Mellon Pension ServicesBNY Mellon Asset Management

Stephen Taub

The funded status of the typical US corporate pension plan stands at its best position since March 2010.

Thanks to the strong stock market performance in December, the average pension's funded status surged 3.8 percentage points in December, to 84.3 percent, according to BNY Mellon Asset Management.    

The typical plan funded status surged 13.1 percentage points since the end of August alone. This marked the largest four-month positive change recorded since BNY began reporting monthly pension statistics in 2006.

The driver of this improvement was US equities, which posted returns in excess of 15 percent during this same period. A 51-basis point increase in the Aa corporate discount rate was an important, but secondary, contributor, said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management.

The funded status finished 2010 0.8 percentage points above the December 2009 level of 83.5 percent, according to BNY Mellon.

The December growth was driven by a 6.8 percent rise in US equities and an 8.1 increase in international stocks, according to the report.

Liabilities fell 0.9 percent in December, due to an increase in bond yields as the Aa corporate discount rate rose from 5.32 percent to 5.43 percent, according to the report.

Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Higher yields on these bonds result in lower liabilities.

"The last two years have been a challenge for pension plan sponsors," Austin said in the report.

While in 2009, plan sponsors experienced a steady, significant improvement in funded status as the financial crisis ebbed and confidence returned to the markets, 2010 brought tumultuous shifts in funded status, he elaborated.

"We expect US plan sponsors to continue efforts to closely manage plan funding volatility," Austin said. "In particular, we believe adoption rates for risk reduction programs based on target funding levels will increase, especially in the presence of higher interest rates and strong equity returns."

 

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