The funded status of the typical U.S. corporate defined benefit plan plunged 6.5 percentage points in May to 69.8%, according to BNY Mellon — the lowest funded status since the firm began tracking that data in December 2007.
The funded status has fallen by 10 percentage points over the past two months. The previous low was 70.1% in September 2011.
The May decline was because of sharp declines in equity markets and falling interest rates, according to the latest monthly report from BNY Mellon Asset Management. U.S. equities markets declined 6.2%, their worst monthly showing so far for 2012, while international developed markets equity plunged 11.5%.
In a telephone interview, Jeffrey B. Saef, managing director at BNY Mellon Asset Management and head of the investment strategy and solutions group, said the blow to asset levels for a typical portfolio with 50% in the Russell 3000 index, 10% in the MSCI EAFE index and 40% in the Barclays Aggregate fixed income index was only partly offset by gains on bond exposure as interest rates fell.
However, that same decline in rates lowered the Aa corporate discount rate companies use to calculate the present value of their liabilities by 31 basis points to a record low of 3.98%, boosting the present value of liabilities by 5.1% for the month.
Mr. Saef, while noting that nuggets of promising news from government policymakers were still capable of inspiring the kind of bouts of stock market rebound seen on Wednesday, said the combination of weak equity markets and low interest rates could persist until investors have more clarity about the longer-term economic outlook.