The funded status of typical US corporate pension plans declined by 4.9 percentage points to 82.4 percent in January, according to BNY Mellon’s Investment Strategy and Solutions Group (ISSG).
The drop has been attributed to a dip in the Aa corporate discount interest rate, which determined the liabilities. It finished January at an all-time low of 3.58 percent, sending liabilities 7 percent higher.
Assets for the typical corporate plan increased by only 1 percent in January, as they were also affected by the increased liabilities.
The rise in assets was also negatively affected by the weak performance of US equities, which detracted from improvements in other asset classes.
Plan liabilities are calculated using yields of long-term investment-grade bonds, meaning that lower yields result in higher liabilities.
According to the ISSG results, public defined benefit plans, endowments and foundations each missed their return targets because of weak US equities markets. The funded status for the typical corporate plan dropped by 12.8 percent since the record high of 95.2 percent in December 2013.
The results attributed an improvement in corporate plan assets in January to gains in the fixed income and emerging markets equities. Public plans benefitted from the performance of real estate investment trusts and high-yield public income, but were held back by the falling values of US equities.
Public defined benefit plans missed their January targets by 0.7 percent as assets declined by 0.1 percent. Year-on-year, public plans underperformed, missing their target by 1.4 percent.
Endowments and foundations reportedly benefitted from allocations to emerging markets and hedge funds, but couldn’t keep up with targets because of the weak equity markets in the US. Real return for January was negative 0.5 percent, with assets returning negative 0.3 percent.
Year-on-year endowments and foundations are behind on their inflation plus spending target by 1.2 percent.
Andrew Wozniak, head of fiduciary solutions and BNY Mellon ISSG, said: "The huge fall in funded status in January combined with the changes in the mortality assumptions that many plans implemented in December 2014 means that many corporate plans saw their funded status drop by more than 10 percentage points in two months."
He added: "This could be a signal to plans to take on more risk by making such moves as increasing their exposures to equities and alternatives or going to shorter duration fixed income. Shorter duration fixed income may better position them to improve their funding if rates rise."
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