Drop in Interest Rates Sends Liabilities Up Sharply

BOSTON, August 3, 2011 — The funded status of the typical U.S. corporate pension plan in July fell 4.9 percentage points to 83.6 percent, the worst level since the beginning of the year and the lowest funded status since November 2010, according to monthly statistics published by BNY Mellon Asset Management.

Pension plans were hit by both increasing liabilities and falling assets, with the most significant impact coming from a rally in long corporate bonds. Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management, attributed the rally to increased demand for U.S. Treasuries, reflecting the instability of the U.S. and European economies and investors' flight to quality.

Liabilities increased 5.2 percent as the Aa corporate discount rate decreased 36 basis points to 5.17 percent, according to the BNY Mellon Pension Summary Report for July.   Plan liabilities are calculated using the yields of long-term investment grade corporate bonds.  Lower yields on these bonds result in higher liabilities.

Assets for the typical plan fell 0.7 percent, reflecting declines in U.S. and global equities, the report notes.

"Falling interest rates had a severe impact on the funded status of the typical corporate plan," said Austin. "As a result of the rate decline, corporate plans gave up all of the gains they had achieved in 2011 and finished July 1.5 percentage points lower than they were at the beginning of the year."

Austin added the debt ceiling issue and the growing focus on the U.S. budget are making it more difficult for plan sponsors to manage the volatility of funding levels.  He said, "Plans that hedged against falling rates through liability driven investment strategies were most successful in preserving their funded status during July."

BNY Mellon Asset Management is one of the world's leading asset management organizations, encompassing BNY Mellon's affiliated investment management firms and global distribution companies. Information about BNY Mellon Asset Management can be found at www.bnymellonam.com.

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