(updated with correction)
The funding ratios of U.S. defined benefit pension plans declined in July because of poor equity returns, increased demand for U.S. Treasuries and concern over the stability of U.S. and European markets, according to two reports released Wednesday.
BNY Mellon Asset Management said the funding ratio of the typical U.S. corporate defined benefit pension plan fell 4.9 percentage points to 83.6% last month. Assets for the typical plan fell 70 basis points caused by a decline in U.S. equities, while liabilities increased 5.2% and the corporate discount rate decreased 36 basis points to 5.17%, according to a BNY Mellon news release.
Instability in the European and U.S. economies prompted a flight to quality, resulting in an increased demand for U.S. Treasuries, Peter Austin, executive director of BNY Mellon Pension Services, said in a telephone interview.
Mr. Austin added all the funding gains that plans made in 2011 have been eroded.
“We've given back everything we've picked up this year and now we're beginning to invade the gains from 2010.”
In a separate report from Mercer, the funding ratio of pension plans sponsored by S&P 1500 companies dropped three percentage points in July to 83%, with the overall deficit growing to $305 billion, up from $231 billion a month earlier.
Equities declined 2%, while corporate discount rates for the typical U.S. pension plan decreased about 30 basis points, according to a Mercer news release.
The estimated aggregate value of S&P 1500 plan assets was $1.44 trillion as of the end of July, while aggregate liabilities were $1.75 trillion.
Mick Moloney, senior partner and head of Mercer's financial strategy group, said in a telephone interview that although it seems that the resolution of the debt-ceiling debate would have calmed markets, he has seen increased equity volatility and a flight to Treasuries, both of which are bad for pension funds.
He said volatile markets and other factors so far in August probably will result in a drop of another couple percentage points in funded status for the month.