BNY Mellon Survey Shows Funded Status of US Pensions Rises to 88%

(March 7, 2011) — The funding ratio for US corporate plans hit 88% in February, according to BNY Mellon Asset Management. 

While assets for the typical plan increased 2.3% in February, US equities rose 3.6% and international equities increased by 3.3%. “U.S. corporate pension plans have seen a steady stream of good news since August 2010, when the funded status of these plans was hovering slightly above 70%,” said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management, in a statement. “This rapid improvement in funded status has prompted a growing number of pension sponsors to reassess their asset allocation strategies.”

Austin noted that one approach to drive funding improvement includes reductions in plan funding volatility through higher allocations to fixed income and/or interest rate risk hedging programs. He added that another approach is continued reliance on return-seeking asset classes, such as equities and alternatives, which have continued to gain popularity in 2011. According to the latest quarterly CIO study by KBW analysts, the outlook for active equity has modestly improved, while alternative strategies in particular seem poised to generate new flows.

Earlier this month, figures from Mercer show that the aggregate deficit in pension plans sponsored by S&P 1500 companies decreased by $14 billion during February.

“Despite the positive trend over the past six months, funded status has only improved marginally since this time last year,” said Kevin Armant a principal with Mercer’s Financial Strategy Group, in a statement. “There are still many plan sponsors waiting on the sidelines hoping for funded status improvements through high equity returns and further increases in interest rates.”

According to Mercer, the deficit dropped from $270 billion on January 31 to $256 billion as of February 28, 2011, corresponding to an aggregate funded ratio of 85% as of February 28, compared to a funded ratio of 81% at December 31, 2010.

Meanwhile, last month, Hymans Robertson’s “FTSE350 Pensions Indicator Report,” which examines the state of UK pension finances, found that the regulatory focus on filling scheme deficits quickly is “unhelpful,” warning that sponsors should resist the pressure to rush to ‘plug the hole’ until they have a clear de-risking strategy in place. “In our view, most schemes, and scheme sponsors, would benefit from a slower, more stable, approach to funding,” Clive Fortes, Head of Corporate Consulting at Hymans Robertson, stated in a release. “In this regard, the regulatory focus on speed of recovery is unhelpful and potentially damaging to businesses and to their pension schemes.”