A boost in United States and global equity markets led in January to a 1.7% increase in the funded status of the typical U.S. corporate pension plan, according to a newly released report from BNY Mellon Asset Management.

Thanks to this strong yearly start in stocks, the typical plan’s funded status reached 74.1%.

The paper, titled BNY Mellon Pension Summary Report for January 2012, paints a cautiously sanguine picture of the industry. U.S. equity markets started off the year with a 5% return, while those in international developed markets garnered 5.3%.

Consequently, assets for the typical plan in January increased 3.4%, offsetting a 1.1% increase in liabilities. The rise in liabilities was due to tightening Aa corporate bond spreads, resulting in a six-basis-point decline in the Aa corporate discount rate to 4.3%, according to the report. Meanwhile, the Treasury discount rate for the typical pension liability index rose one basis point to 2.8%.

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

“This improvement has been largely due to the rally in equities, which has boosted asset values, as low interest rates have continued to prop up liabilities,” said Jeffrey B. Saef, managing director, BNY Mellon Asset Management, and head of the BNY Mellon Investment Strategy & Solutions Group. The group is a division of The Bank of New York Mellon.

Saef described the recovery in pensions, from their 70.1% funding low point last September, as “choppy.” For example, in October, pension funding rose to 74.8%, and then rose again in November, to 75.1%. However, it had dipped in December to 72.4%.

He said that it was too early to see where this trend might lead. However, Saef said any positive movement in funding status for pension plans would only increase the number of plans looking to lower funding volatility by better matching asset and liability returns via liability-driven investments or freezing plans to new employees.

Tommy Fernandez writes for Money Management Executive.


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