Corporate Funding Ratio Falls in May to 82%

(June 7, 2010) — Market decline erased more than 4 percentage points off the typical corporate pension plan’s funding status, according to Bank of New York Mellon, leaving the average program 82% funded – its lowest level since October 2009.

The company said pensions were 88% funded as recently as March, when stocks were still rising and credit spreads were reduced. The funded status for the typical U.S. corporate pension plan is down 3.5% for the year.

“U.S. stocks in May had their worst month since February 2009, declining nearly 8%, while a weakening euro helped to send international stocks down more than 11%,” said Peter Austin, executive director of BNY Mellon Pension Services, which produces the monthly pension summary report, in a news release. “May’s results wiped out equity gains on a year-to-date basis.”

Austin added that the May 6 market flash crash in the US serves as a reminder of the sensitivity of equity markets, as persistent fears about the European sovereign debt crisis and the fragility of the global economic recovery will likely lead to increased market volatility for the near-term. “In response to this expected volatility, we are hearing from a growing number of corporations that are seeking new solutions to manage financial risks posed by their pension plans,” he said. “There appears to be growing interest for funding strategies that seek to establish deadlines to achieve and maintain specific funding levels, with the goal of providing a buffer against wide swings in either the equity markets or in interest rates.”

While declining stocks hurt plan assets, the plans’ liabilities actually rose a mere 0.3% in May. Despite the May downturn, falling stock values has still left pension plans better funded than they were in the heart of the banking panic in February 2009, when the average plan was just 73% funded, Bank of New York Mellon data revealed.

BNY Mellon, the corporate brand of The Bank of New York Mellon Corporation, operates in 34 countries and serves more than 100 markets with $1.1 trillion in assets under management. The BNY data tracks the performance of a “moderate risk portfolio” comprising half domestic stocks, 10% foreign stocks and 40% bonds.