Wed, 08/01/2014 - 10:10
The funded status of the typical US corporate pension plan in December 2013 improved 1.3 percentage points to 95.2 per cent, the highest level since September 2008.
The improvement came as rising equity markets drove assets higher and rising interest rates lowered liabilities, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).
Public defined plans, endowments and foundations benefited in December from the equity rally as well as their holdings in private equity.
For US corporate plans, assets increased 0.8 per cent and liabilities fell 0.6 per cent. The decline in liabilities was due to an eight-basis-point increase in the Aa corporate discount rate to 4.93 per cent. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
"December capped off a strong year as the funded status of the typical US corporate plan increased more than 18 percentage points in 2013," says Jeffrey B Saef, managing director, BNY Mellon, and head of ISSG. "It was the best of all worlds as rising equities benefited the asset side, while the rising discount rate resulted in lower liabilities. These trends have encouraged a growing number of plan sponsors to reduce their exposure to market volatility."
On the public side, the typical defined benefit plan in December achieved excess return of 0.4 per cent over its annualised 7.5 per cent return target. Public plan assets must earn at least 0.6 per cent each month to keep pace with the 7.5 percent annual target.
For endowments and foundations, the net return over spending and inflation was 0.7 per cent as plan assets increased 1.1 per cent. Endowments and foundations continue to be aided by the low-inflation environment, which makes it easier for them to achieve their goals.
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