US - Funded status of US pension plans increased to 80.3% at the end of October, BNY Mellon Asset Management finds.
US pension plans' funded status has continued to rise two straight months reaching the highest since May 31, 2010, thanks to strong equity returns and a rising discount rate, BNY said today. The Aa corporate discount rate increased to 5.23% from 4.98% leading to a 3.2% drop in the typical plan's liabilities.
Assets for the typical plan rose 2.5% in October, as U.S. equity markets increased 3.9% and international stocks rose 3.6%. BNY defines the typical plan as one that invests 50% in the Russell 3000, 10% MSCI EAFE and 40% Barclays Capital Aggregate.
Peter Austin, executive director of BNY Mellon Pension Services said: "Back-to-back months of strong equity performance and a rising discount rate have provided much needed relief to U.S. corporate pension plans. Over the last two months the typical plan has experienced a nine percentage-point improvement in funded status, which is significant. But we should keep in mind that we were working off the lowest funded status recorded since we started reporting in 2005, and overall funding remains historically low at just above 80%."
Meanwhile, funding levels remain volatile, as evidenced by the sharp jump in the discount rate over the month. The funding swings are leading plan sponsors to develop programmes to deal with funding volatility.
"Of particular interest are programs that target a specific funding level by a certain date, with built-in flexibility to dynamically manage asset allocation based on market factors," said Austin.
BNY Mellon's data resembles figures released by Mercer showing the pension funds within the S&P 1500 companies were only 78% funded at the end of October, up two percentage points from the previous month.
Deficit in pension plans sponsored by S&P 1500 companies decreased by $56bn to $373bn at the end of October. Long maturity AA bonds also generated an increase in yields of approximately 17 basis points following the historic decline at the end of August.
Kevin Armant of Mercer's Financial Strategy Group said: "Although long maturity AA bond rates have risen in October, they are still down 60-70 basis points for the year. The impact of declining interest rates has resulted in liability increases which have more than offset the benefit of positive asset performance year to date. While October showed some improvement in the aggregate funded status, there is still a long way to go before most plans will be considered adequately funded."
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