The funded status of the typical U.S. corporate pension plan increased 3.1 percentage points in June 2013 to 89.5 percent, the highest level since June 2011, when it was 91.4 percent, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG. Year to date, the funded ratio is up 13.2 percentage points, ISSG said.
The improvement was driven for the second month in a row by a jump in the Aa corporate discount rate, which drove liabilities sharply lower, according to the BNY Mellon Pension Summary Report for June 2013. Liabilities for the typical corporate plan fell 5.0 percent as the discount rate on the Aa corporate bonds increased 39 basis points to 4.69 percent, the report said. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.
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Assets for the typical corporate plan fell 1.6 percent as U.S. equity markets had their first losing month in 2013, the report said.
"Investors are growing more confident that the U.S. Federal Reserve is getting ready to taper its easing policies, and this is resulting in higher interest rates, which benefits plans," said Jeffrey B. Saef, managing director, BNY Mellon Investment Management, and head of the ISSG. "While assets fell slightly in June, the big decline in liabilities more than compensated for the fall in equity values, leading to the improvement in funded status."
Saef added that many pension plans view a funded status of 90 percent as a threshold for shifting a portion of their equities into liability-matching assets. "With the funded status at over 89 percent and yields rising, we would not be surprised to see a growing number of companies moving assets into longer term corporate bonds."
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