Weak Stock Market, Falling Interest Rates Damper US Corporate Pension Funding

(September 9, 2010) — The funding ratio of the typical US corporate pension plan dropped 5.6 percentage points in August to a four-year low at 71.3%, according to a recent study by BNY Mellon Asset Management.

The slump in corporate pension funding shows how stagnant stock markets and heightened expenses have put mounting pressure on the health of pension plans in recent years, leading to an alarming shortfall in meeting liabilities. Last month, assets for the typical plan fell 2.1% while liabilities increased 5.5%, the group stated.

“August was one of the worst months of 2010 for corporate pension plans as they were hit by sharply rising liabilities as well as declining assets,” said Peter Austin, executive director of BNY Mellon Pension Services, the pension services arm of BNY Mellon Asset Management, in a statement. “While corporate spreads increased, the dramatic decline in Treasury yields, reflecting a flight to quality, pushed nominal corporate interest rates to historic levels. Since March, pension funds have had little to cheer about, as the funded status for the typical corporate plan has fallen more than 14 percentage points.”

Meanwhile, US equities in pension plan holdings fell 4.7% and international stock dropped 3.1% in August. The Aa corporate bond rate fell to 4.92% in August, from 5.29% a month earlier. The firm additionally noted that the so-called discount rate on AA-rated corporate debt dropped to 4.92% at the end of August, more than a 30-year low, from 5.29% a month earlier.

Since 2006, the unit of Bank of New York Mellon Corp. has been issuing monthly readings on U.S. pension plans since 2006.