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Funded Status of U.S. Corporate Pensions Rises to 92.6 Percent, According to BNY Mellon ISSG

Public Plans, Foundations and Endowments also Gain 

The funded status of the typical U.S. corporate pension plan improved 1.7 percentage points in February 2014 to 92.6 percent as most asset classes gained during the month, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).    The BNY Mellon Institutional Scorecard for February noted the gains in asset values outpaced the rise in liabilities, which resulted from falling interest rates.

Year to date, the funded status of the corporate plans is down 2.6 percentage points, according to the scorecard.

"The financial status of pensions, endowments and foundations in February recovered a significant amount of the ground they lost in January as most asset classes recovered," said Andrew D. Wozniak, director, portfolio management and investment strategy, ISSG. "Concerns about global growth fundamentals that had surfaced in January appeared to abate somewhat in February.  Commodities were the best performing asset class in February, rising 6.24 percent."

For U.S. corporate plans, assets increased 3.3 percent and liabilities increased 1.4 percent during the month, ISSG said.  The increase in liabilities in February was due to an eight-basis-point decline in the Aa corporate discount rate to 4.58 percent, the report said.  Plan liabilities are calculated using the yields of long-term investment grade bonds. Lower yields on these bonds result in higher liabilities.

On the public side, assets at the typical defined benefit plan in February rose 3.5 percent, producing excess return of 2.9 percent above the monthly goal of positive 0.6 percent returns, ISSG said.  Year over year, public plans are ahead of their target by 4.9 percent, ISSG said.

For endowments and foundations, the real return was 3.0 percent, which exceeded the target for spending plus inflation, ISSG said.  Investments in commodities and real estate helped endowments and foundations to strong performance in February, the report said.

Mellon Capital Management, BNY Mellon's San Francisco-based multi-asset manager, attributed the spike in commodities to unusual weather conditions in the U.S. and abroad, setting off concerns about potential grain shortages.

"We do not view the rise in commodities as a signal of future excessive inflation," said Suzanne Ly, vice president, asset allocation portfolio management, Mellon Capital. "The strength in the commodity markets should abate as the weather normalizes and inflationary pressures remain low."

Wozniak said plan sponsors continue to show interest in strategies to hedge their portfolios against market volatility.  "Many sponsors view the continuing financial strength of corporate pensions as an opportunity to lower the risks they face," he said.

The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.