Sliding stock markets and rising liabilities combined to reduce the funded status of the typical U.S. corporate pension plan in January by 1.8 percentage points to 83.7%, according to monthly figures published by BNY Mellon Asset Management. It was the first decline in funding status since October.
Assets for the typical U.S. corporate pension plan fell 1.6 percent and liabilities increased 0.5% for the month, as reported by the BNY Mellon Pension Summary Report for January 2010.
“Economic concerns weighed on U.S. stocks, which was the primary factor driving assets lower for the month,” says Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. “International stocks fell even more than U.S. stocks, further contributing to the asset decline. The yields on long Aa corporate bonds were mostly unchanged, but liabilities increased slightly due to interest accruals.”
Plan liabilities are calculated using the yields of long-term investment grade corporate bonds. Higher yields on these bonds result in lower liabilities.
“The sudden reversal of stock markets in January is a good reminder that volatility can quickly return to the markets and impact the funded status of corporate pension plans,” says Austin. “While the funded status of plans improved significantly in 2009, the January performance reminds plan sponsors that risk is inherent in corporate pension plans, and requires close monitoring of plan assets to ensure that risk/return relationships are consistent with company objectives. We are seeing an increase in liability driven investing (LDI) activity as more corporate plan sponsors seek solutions for their pension risk exposure.”
D.C.