The funded status of the typical U.S. corporate defined benefit plan and the aggregate S&P 1500 pension plans reached new lows in July, according to reports from BNY Mellon and Mercer.
The typical corporate plan dropped 2.9 percentage points to 68.7%, according to BNY Mellon — the lowest funded status since the firm began tracking that data in December 2007, while Mercer said S&P companies' funded status dropped to 70%, surpassing the low of 71% in August 2010.
Both reports also saw record lows in discount rates.
“It's always a little more surprising than expected,” said Jeffrey B. Saef, managing director at BNY Mellon Asset Management and head of the investment strategy and solutions group, about the continuous drop in funded status. “When you think the pain can't get worse, it gets worse.”
Assets increased 1.2% in the month, according to BNY Mellon's report, but liabilities grew 5.5% as the discount rate fell 34 basis points to 3.64%. For the year, assets are up a solid 7.3%, but cannot keep up with the rapid increase in liabilities, which have grown 13.1%. The funded status of a typical plan decreased 3.7 percentage points year to date.
“What's clearly going on coming out of the financial crisis is a subpar recovery,” Mr. Saef said in a telephone interview. “The biggest change is that (the recovery) has weakened,” and is compounded with the European debt crisis and the political uncertainty in the U.S. “Those two factors put together weigh heavily on the markets.”
Mercer reports U.S. equity markets were up 1.4% for July, but the discount rate fell 30 to 55 basis points, resulting in liabilities increasing 3% to 11%. The discount rate of a typical plan was 3.48%, said Jonathan Barry, a partner in Mercer's retirement risk and finance consulting group.
For the month, U.S. equity markets returned 1% and international developed markets gained 1.1%, according to BNY Mellon. Bonds continue to perform well in July, with the Barclays Long Credit Aa returning 4.9% and the Barclays Long Treasury, 3.3%. Mr. Saef said he continues to see more assets shifted out of equity into long-duration fixed income. He added plans that have implemented liability hedging strategies have performed better than peers in recent years.
Mr. Barry said interest is rising in offering lump-sum payments to terminated vested employees, such as the one announced by NCR Corp. earlier this week. He said such payments are essentially the same as buying bonds to match liability growth, as in LDI investing, but that the liabilities are off the books entirely, unlike LDI bonds that might not match up perfectly with liabilities.
“We're not surprised to see the activity,” Mr. Barry said about lump-sum offers. “What will accelerate it into 2013 and beyond are the raised PBGC premiums (passed as part of a federal highway bill passed last month). There's a pretty compelling case to do the lump-sum cash-out solely for the reduction in risk premiums.”
The estimated aggregate value of pension plan assets of the S&P 1500 companies at the end of July was $1.57 trillion, up from $1.55 trillion in June. The aggregate liabilities reached a record high of $2.26 trillion, up from $2.09 trillion in June.