Public Pension Plans, Endowments and Foundations Also Benefit from Improving Markets

NEW YORK, November 4, 2013 — Strong equity and fixed income returns in October contributed to rising assets for corporate defined benefit plans, public defined benefit plans, and endowments and foundations in the U.S., according to the BNY Mellon Investment Strategy & Solutions Group (ISSG).   The funded status of the typical U.S. corporate plan rose 0.8 percentage points to 91.8 percent in October, ISSG said.

Corporate plans led the three groups as public equities outperformed alternatives in October.  However, public pension plans and endowments and foundations in the U.S. also exceeded their targets during the month, ISSG said.

"Corporate plans continue to benefit from rising equity markets, although Aa corporate bond yields fell for the first time since July, leading to higher liabilities," said Jeffrey B. Saef, managing director, BNY Mellon, and head of ISSG.  "Still, assets for corporate plans rose 2.6 percent, outpacing the 1.7 percent increase in liabilities.  With the funded status of these plans continuing to move higher, we see growing interest from plan sponsors in strategies that can lower exposure to market volatility."

On the liability side for corporate plans, the Aa corporate discount rate in October 2013 fell 11 basis points to 4.70 percent, leading to the higher liabilities.  However, the rate remains 98 basis points higher than in October 2012, ISSG said.  Year to date, the funded ratio for corporate pension plans is up 14.7 percentage points, according to the BNY Mellon Institutional Scorecard.

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, the typical defined benefit plan in October posted a 1.8 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 endowments and foundations, the net return over spending and inflation was 1.4 percent as plan assets increased 1.9 percent. Endowments and foundations have benefited from low inflation for the past year, but ISSG notes that an increase from current levels could make it more difficult for them to achieve their return targets.

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

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