The funded ratio of the typical U.S. corporate pension plan improved 3 percentage points in December to 85.5%, the highest percentage of 2009, according to BNY Mellon Asset Management.
The improvement was propelled by rising stock returns and an increase in Aa corporate bond yields.
Peter Austin, executive director of BNY Mellon Pension Services, said in an interview that volatility continued in equity markets and corporate bond discount rates in December. The Aa corporate bond discount rate jumped 25 basis points in December, and Treasury yields were up about 50 basis points. He said the spread between Treasuries and the Aa corporate bond discount rate is the tightest it's been since June 2007.
“The point that we're making in this is the fact that interest rates will continue to be a volatile segment of the market in 2010,” Mr. Austin said. “Sponsors of pension plans should be sensitive to changes in interest rates. They change the value of liabilities, and they do not necessarily correlate with changes in equity values.”
He said the continued volatility in equity markets reinforces the need for liability-driven investment strategies.
“If they are still heavily allocated to equities, then it's been a good bet this year,” he said. “But we think there will be some sponsors who take equity risk off the table and lock in these gains and reinvest in fixed income.”