The funded status of corporate defined benefit plans experienced a significant drop in January, giving back some of the large gains made in 2013, according to reports from Mercer and BNY Mellon Investment Management.
The funded status of S&P 1500 companies' pension funds, as studied by Mercer, fell six percentage points to 89%, while BNY Mellon reports the typical corporate plan saw its funded status drop 4.2 percentage points to 91%, the largest single-month decrease since May 2012.
Funded status was hurt both by market performance and a drop in the discount rate. Mercer reported the discount rate decreased by 35 basis points to 4.34%, while BNY Mellon said it fell 27 basis points to 4.66%. The discount rate was up about a full percentage point in 2013.
“We're almost at what I call a funded status correction,” said Andrew Wozniak, director, portfolio management and investment strategy, at BNY Mellon. He pointed to disappointing earnings statements, a slowdown in China manufacturing and the Federal Reserve continuing its tapering as reasons for the down month. “The funded status dropped about four points … and wiped out the (fourth-quarter) gains.”
Mr. Wozniak said corporate pension funds actually fared better than typical public plans or foundations and endowments in January because of an unexpected bond rally. He added a typical corporate plan has a 26% allocation to long-duration bonds, which were up 4% for the month. Corporate plans saw assets fall by 0.4%, while liabilities increased 4.2%. A typical public pension fund was down 1.4% for the month, and foundations and endowments, down 0.9%.
“Put your seat belt on because it's going to be a wild ride this year,” Mr. Wozniak said in a telephone interview, pointing out the Chicago Board Options Exchange Market Volatility index, known as the VIX, spiked last month.
The overall pension fund deficit of S&P 1500 plans more than doubled in January to $232 billion from $103 billion. Total assets dropped to about $1.83 trillion from $1.85 trillion at the end of 2013.