Worst Month since May 2012
U.S. corporate pension plans in January 2014 gave up all of the gains they had achieved in the fourth quarter of 2013 as the funded status of the typical plan slid 4.2 percent to 91.0 percent, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG). The BNY Mellon Institutional Scorecard for January noted falling interest rates sent liabilities higher and declining stocks sent assets lower.
Public defined benefit plans, endowments and foundations also lost ground in January as a result of the falling equity markets, ISSG said.
"January's decline was the largest monthly drop in funded status for U.S. corporate plans since May 2012," said Andrew D. Wozniak, director, portfolio management and investment strategy, ISSG.
For U.S. corporate plans, assets fell 0.4 percent and liabilities increased 4.2 percent, ISSG said. The increase in liabilities was due to a 27 basis-point decline in the Aa corporate discount rate to 4.66 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.
"Investors became more concerned about global growth fundamentals and the prospects for some emerging markets," Wozniak said. "As they became more cautious, assets shifted to bonds, sending rates lower."
On the public side, assets at the typical defined benefit plan in January fell nearly 1.4 percent, missing the plans' monthly goal of positive 0.6 percent returns, ISSG said. Year over year, public plans are ahead of their target by 1.5 percent, ISSG said.
For endowments and foundations, the real return was -1.4 percent, which was short of its target for spending plus inflation, ISSG said. The report said assets fell 0.9 percent. Investments in real estate and hedge funds helped endowments and foundations to mitigate their assets losses for the month, the report said.
Mellon Capital Management, BNY Mellon's San Francisco-based multi-asset manager, was optimistic about the prospects for improving funded status over the longer term.
"Despite worries about growth and uncertainty in select emerging markets, we expect global growth to improve this year supporting equity prices and providing a headwind for fixed income," said Vassilis Dagioglu, managing director and head of asset allocation portfolio management at Mellon Capital.
The BNY Mellon Investment Strategy and Solutions Group is a division of The Bank of New York Mellon.