Assets and liabilities for the typical moderate risk U.S. corporate pension plan both rose 5.4% in July, according to monthly statistics published by BNY Mellon Asset Management.
This resulted in the funded status of the typical plan holding steady at 79.2% for the month. For the year, through 31 July 2009, the funding ratio for the typical plan is now up 5.3 percentage points from 73.9% at 31 December 2008, as represented by the BNY Mellon Pension Liability Index.
Plan liabilities are calculated using the discount rate of long-term investment grade corporate bonds. Lower yields on these bonds result in higher liabilities.
“July’s stock market euphoria has not translated into pension funded status gains,” says Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. “While U.S. stocks returned nearly 8% and international stocks were up more than 9% in July, these big gains were only enough to offset the rise in liabilities that plans face. This rise in liabilities was due to the decline in the discount rate on Aa corporate bonds to 5.88% from 6.28% at the end of June.”
“Pension plan managers now must weigh the options of positioning their portfolio for further gains in the equity markets against adopting a defensive posture to protect against a rise in liabilities. A majority of corporate pension plans continue to be under funded. A continuing equity rally would lower the contributions that companies would need to make to their pension plans to achieve full funding. However, declining stock markets or a further drop in bond yields would put increasing pressure on the plans.”
L.D.