Pension Plans, Endowments and Foundations Benefit from Equity Rally
The funded status of the typical U.S. corporate pension plan in December 2013 improved 1.3 percentage points to 95.2 percent, the highest level since September 2008, 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, ISSG said.
For U.S. corporate plans, assets increased 0.8 percent and liabilities fell 0.6 percent, ISSG said. The decline in liabilities was due to an eight-basis-point increase in the Aa corporate discount rate to 4.93 percent. 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 U.S. corporate plan increased more than 18 percentage points in 2013," said 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 percent over its annualized 7.5 percent return target, ISSG said. 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 0.7 percent as plan assets increased 1.1 percent. Endowments and foundations continue to be aided by the low-inflation environment, which makes it easier for them to achieve their goals, ISSG said.