As a result of stock market declines and lower interest rates, the funding status of the average U.S. corporate pension plan declined to its lowest level since February 2009.

According to monthly data published by BNY Mellon Asset Management, which was released Tuesday, the funded status in June declined six percentage points to 74% percent.  Through the end of June, the funded status of the typical U.S. corporate plan is down 9.5 percentage points for the year.

The falling stock markets resulted in a decline of 2.3% in assets at the typical U.S. corporate plan, while liabilities increased 5.6% last month, according to the BNY Mellon Pension Summary Report.  Plan liabilities are calculated using the yields of long-term investment grade corporate bonds.  Lower yields on these bonds result in higher liabilities.  

“Investors’ fears sent U.S. stocks down 5.7% in June, which followed the 7.9% fall in May,” said Peter Austin, the executive director of BNY Mellon Pension Services, the Boston-based pension services arm of BNY Mellon Asset Management. “The second quarter decline of 11.3% in U.S stocks was the worst quarterly performance since the fourth quarter of 2008.”  

The June rally in Treasuries led to a 39-basis-point drop in the Aa corporate discount rate to 5.34%, the lowest point since June 2005, according to BNY Mellon Asset Management.  

Since pensions experienced pressure from both the asset and liability side last month, Austin said “there doesn’t appear to be a quick fix on the horizon.”

“Poor asset returns and dropping interest rates are prompting both corporate and public sector plans to consider more active approaches to managing their funding strategies,” he said. “Interest in Liability-Driven Investing strategies remains high, with many sponsors adding objectives such as deadlines to reach specific target funding levels.” 

Earlier this month, S&P Indices reported that funding in pension plans improved slightly last year, but remained “significantly underfunded.”

According to the report, S&P 500 defined pension plans rose to 81.65% from 78.1% a year earlier, but remains significantly underfunded by $260 billion. The report, paints an equally dark picture for Other Post Employment Benefits, which remains severely underfunded at $214 billion in shortfalls.


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