Falling interest rates and a drop in stock markets in January caused U.S. corporate pension plans to give up all of the gains they had achieved in the fourth quarter of 2013, as the funded status of the typical plan fell 4.2% in January to 91%, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
The slide was the largest monthly drop for U.S. corporate plans since May 2012, as assets fell 0.4% and liabilities increased 4.2%, ISSG found. Specifically, liabilities, which are calculated on an inversely proportionate basis to interest rates for long-term investment grade bonds, suffered from a 27 basis-point decline in the Aa corporate discount rate to 4.66%.
“Investors became more concerned about global growth fundamentals and the prospects for some emerging markets,” says Andrew D. Wozniak, director, portfolio management and investment strategy, ISSG. “As they became more cautious, assets shifted to bonds, sending rates lower.”
Public defined benefit plans as well as endowments and foundations also struggled in January, though not quite as much. The typical public defined benefit plan fell short of its 7.5% return target by 2%. For endowments and foundations, real return, which is calculated after inflation and 5% spending, fell 1.4%. Real estate and hedge fund investments helped mitigate some of the losses from equities for these plans.
Although the year started off on the wrong foot, there is still reason for optimism.
“Despite worries about growth and uncertainty in select emerging markets, we expect global growth to improve this year supporting equity prices and providing a headwind for fixed income,” says Vassilis Dagioglu, managing director and head of asset allocation portfolio management at Mellon Capital, BNY Mellon’s San Francisco-based multi-asset manager.
U.S. Corporate Pension Plans Have Worst Month Since May 2012
Falling interest rates and a drop in stock markets in January caused U.S. corporate pension plans to give up all of the gains they had achieved in the fourth quarter of 2013, as the funded status of the typical plan fell 4.2% in January to 91%, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).