Public Pension Plans, Endowments and Foundations Exceed Targets as Equities Rise

NEW YORK, October 3, 2013 — Rising equities in the U.S. and international markets lifted the funded status of typical U.S. corporate pension plans 2.9 percentage points to 91.0 percent in September, the first time they have topped that level since June 2011, according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).

Public pension plans and endowments and foundations in the U.S. also exceeded their targets in September, ISSG said.

"Rising above a funded status level of 90 percent is important to many corporate pension plans as they are more likely to implement strategies that can lower a plan's exposure to market volatility," said Jeffrey B. Saef, managing director, BNY Mellon Investment Management, and head of the ISSG.  "The recent equity market returns are helping corporations outperform their liabilities."

These returns also are helping public defined pension plans to meet or exceed return targets and endowments and foundations to meet or exceed their spending goals, according to the ISSG report for September.

The Boston Company Asset Management (TBC), the Boston-based equities investment boutique that is part of BNY Mellon, observed that rising investor confidence is driving the recent rallies in international stock markets.  Mark A. Bogar, managing director at TBC, said, "We've seen more widespread optimism as economic conditions, especially in continental Europe and Japan, have bottomed and begun to improve."

For September, the rise in equities contributed to the 3.1 percent increase in assets for the typical U.S. corporate pension plan, ISSG said.  Liabilities for these plans fell 0.2 percent, as the Aa corporate discount rate rose three basis points to 4.81 percent during the month, ISSG said.  Year to date, the funded ratio for corporate pension plans is up 13.9 percentage points, according to the BNY Mellon Institutional Scorecard.

Plan liabilities are calculated using the yields of long-term investment grade bonds.  Higher yields on these bonds result in lower liabilities.

On the public side, the typical defined benefit plan in September posted a 3.4 percent excess return 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 the month, assets of the typical public plan outperformed those of corporate pension plans and foundations and endowments as a result of the public plan allocations to private equity, ISSG said.

Private equity, which comprises 10 percent of the typical public defined benefit plan, was one of the best performing asset classes in September, returning 9.0 percent, ISSG said.  Year to date, public plan assets are ahead of the return target by 3.8 percent.

For endowments and foundations, the net return over spending and inflation was 2.6 percent as plan assets increased 3.3 percent. Over the past 12 months, plan assets are up 10.7 percent beating the spending and inflation target by 4.4 percent.

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

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