The funded status of U.S. pension plans worsened by 0.8% in November, despite increased returns in most capital markets, according to the Mellon Pension Liability indexes, produced by Mellon Asset Management. Assets of a "moderate risk" pension portfolio - defined as 50% Russell 3000 stock index, 40% Lehman Brothers Aggregate fixed-income index and 10% MSCI EAFE index - rose 1.9% in the month, but "a sharp decline in long-term interest rates drove up the value of typical liabilities by 2.5%," according to a statement from Mellon Pension Services, a unit of Mellon Asset Management.
"Low volatility and expectations of a soft landing for the economy helped nearly all asset classes," Peter Austin, executive director of Mellon Pension Services, said in the statement. "However, evidence of a slowing economy raised expectations for a 2007 Federal Reserve rate cut and drove long-term interest rates down by 10 to 15 basis points. Lower rates raise the value pension liabilities and bonds."
Despite the deterioration in November, "the typical moderate risk pension portfolio was 7.2% better-funded at the end of November than it was at the beginning of the year, primarily due to a double-digit increase in equities, which boosted asset values, and interest rate hikes during the first five months of the year, which reduced liabilities," the statement said. "The assets of a typical plan were 11.3% higher at the end of November, while liabilities were 4.1% higher."
The announcement was first reported Wednesday afternoon on Pensions & Investments' website, www.pionline.com.
The Mellon Pension Liability indexes are hypothetical benchmarks measuring the change in value of pension assets and pension liabilities, enabling sponsors to track how their pension plans are performing, especially those using liability-driven investments, David B. Chittim, senior vice president-investments, Mellon Asset Management, said in an interview.