The funded status of U.S. corporate defined benefit plans fell about three percentage points in the fourth quarter of 2014, and roughly nine percentage points year-over-year, said reports from BNY Mellon, Mercer and Legal & General Investment Management America.
The typical U.S. corporate pension plan ended the year 87.3% funded, down 2.6 percentage points from Sept. 30, and down 7.9 percentage points from the Dec. 31, 2013, high of 95.2% as liabilities rose more than assets, according to the BNY Mellon Institutional Scorecard.
Liabilities increased 18.48% in 2014, while assets rose 8.79%, according to BNY Mellon.
Falling rates “erased nearly all of the 2013 gains in funded status,” said Andrew D. Wozniak, head of fiduciary solutions of the investment strategy and solutions group within BNY Mellon Investment Management, in a telephone interview. Year-over-year, the discount rate fell 93 basis points to 4%.
“For (plan) sponsors, it's a painful reminder that you must take into account liabilities when you're developing your investment strategies,” Mr. Wozniak added.
Corporate DB sponsors had higher allocations to long-duration bonds, which helped them outperform endowments and foundations and public DB sponsors, Mr. Wozniak said. Those bonds increased in value as the discount rate dropped, he added.
Separately, Mercer said the funded status of S&P 1500 companies with DB plans fell to 79% as of Dec. 31, down five percentage points from Sept. 30 and nine percentage points year-over-year as falling rates and strengthening mortality assumptions outweighed investment returns.
The discount rate dropped 88 basis points to 3.81% in 2014, while the S&P 500 rose 11.4%.
New mortality tables published by the Society of Actuaries in 2014 are expected to further increase liabilities by at least 4%, according to Mercer.
“We expect to see an uptick in both glidepath adoption as well as risk transfer in 2015, as sponsors seek to mitigate the impact of pension volatility on their balance sheet and (profit and loss)” said Jim Ritchie, a principal in Mercer's retirement practice, in a news release.
Estimated aggregate assets totaled $1.89 trillion as of Dec. 31, up 5% year-over-year, while estimated projected benefit obligations were $2.39 trillion, up 17.7% from the end of 2013.
America also reported a funding decline in 2014.
The typical corporate DB plan fell to the low 80s from the mid-80s for the quarter ended Dec. 31, said LGIMA's quarterly Pension Fiscal Fitness Monitor.
The discount rate fell 28 basis points, while global equity markets were up 0.52% in the quarter.
According to an earlier LGIMA report, the typical corporate DB plan started the year with a funded status in the low- to mid-90s.
LGIMA's fitness monitor assumes an investment strategy of 60% global equity and 40% aggregate fixed income.
The Society of Actuaries' updated mortality assumptions were not factored into the fourth-quarter estimates for LGIMA.