BNY Mellow: Stock Market Gains Outpace Rising Liabilities to Improve Funding Status of U.S. Pensions

Funding Status of Typical Corporate Plan Tops 80 Percent

BOSTON, October 6, 2009 — U.S. stocks rose for the seventh consecutive month, helping to increase the funded status of the typical U.S. corporate pension plan by 0.6 percentage points in September, according to monthly statistics published by BNY Mellon Asset Management. The funded status of the typical plan increased to 80.3 percent at the end of September, up from 79.7 percent at the end of August, according to the BNY Mellon statistics.

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Assets for the typical U.S. corporate plan increased 2.9 percent versus a gain of 2.1 percent for liabilities during the month. For the year, through September 30, the funding ratio for the typical plan is now up 6.4 percentage points, and has topped 80 percent for the first time since May, as represented by the BNY Mellon Liability Index.

"As was the case in August, pension plans in September benefited because improving stock markets in the U.S. and around the world rose enough to increase plan assets faster than the increase in liabilities, which once again was driven by the decline in Aa corporate bond yields," said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management. "The long Aa corporate bond discount rate continued its long descent, dropping 14 basis points in September to 5.61 percent. Discount rates are now at their lowest levels since August 2005."

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

"Demand for corporate bonds and generally improving financial markets are quickly narrowing the spread between these bonds and Treasuries to more historical levels," said Austin. "This demand has received a boost from plan sponsors who are buying the bonds to control the risk and volatility in their plans. Now that these spreads have narrowed, sponsors need to evaluate the risks in the equities markets versus the probability of further declines in the yields for these bonds."

BNY Mellon Asset Management is the umbrella organization for BNY Mellon's affiliated investment management firms and global distribution companies.

Source: BNY Mellon