Wed, 04/12/2013 - 11:02
The funded status of the typical US corporate pension plan in November improved 2.1 percentage points to 93.9 per cent, the highest level since September 2008, as higher interest rates lowered liabilities, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
Endowments and foundations also improved their financial situation as a result of their holdings in hedge funds and private equities, while public defined benefit plans held steady.
Equities, except for emerging markets, were strong, boosting assets for US corporate plans.
However, the November ISSG report also notes that real estate and fixed income portfolios declined.
The Boston Company Asset Management, the Boston-based equities investment boutique that is part of BNY Mellon, found that US small-cap stocks continued their strong year-to-date performance in November.
"Investors expect Janet Yellen, the new US Federal Reserve chair, to continue the central bank's extremely stimulative monetary policy, which, coupled with the end of the government shutdown, has resulted in further multiple expansion," says Todd W Wakefield, senior managing director, The Boston Company Asset Management. "Small-cap stocks also benefited from fund flows out of bonds into equities."
For US corporate plans, assets increased 0.4 per cent and liabilities fell 1.8 per cent. The decline in liabilities was due to a 15-basis-point increase in the Aa corporate discount rate to 4.85 per cent. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
"Corporate bond yields have resumed their upward march, following a pause in October," says Jeffrey B. Saef, managing director, BNY Mellon and head of ISSG. "The corporate discount rate is now 109 basis points higher than in November of 2012, and the funded ratio for corporate pension plans is up 16.8 percentage points since the beginning of the year. As a result we see more plan sponsors reducing their exposure to market volatility."
On the public side, the typical defined benefit plan in November did not achieve excess return over its annualised 7.5 per cent return target. Public plan assets must earn at least 0.6 percent each month to keep pace with the 7.5 percent annual target.
For endowments and foundations, the net return over spending and inflation was 0.2 per cent as plan assets increased 0.7 per cent. Continuing low inflation has made return targets more easily attainable, although an increase from current levels could make this goal more challenging.
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