Funding at U.S. Corporate Pensions Drops to 2014 Low, BNY Says

Falling interest rates have reduced the ability of U.S. corporate pension plans to fund their obligations to the lowest this year, according to the Bank of New York Mellon Corp.

Plans covered 90.6 percent in May, down 0.4 percentage point, according to a statement from the BNY Mellon Investment Strategy & Solutions Group. Liabilities increased 2.3 percent last month at the typical U.S. pension plan, outpacing a 1.9 percent rise in assets.

The lower funding status this year follows record gains in 2013. The 100 biggest U.S. corporate pension funds narrowed deficits by the most in at least 13 years on higher interest rates and an about 30 percent increase in the Standard & Poor’s 500 index, according to Milliman Inc., an advisory firm in Seattle. If interest rates rise, funding status improves and companies are likely to allocate more to bonds to match liabilities.

“Many plan sponsors continue to maintain their equities allocations as they wait for the funded status of corporate plans to increase,” Andrew D. Wozniak, head of fiduciary solutions at the group, said in the statement. “Should the funded status rise, we would expect to see more plans reduce their exposure to market risk.”

Corporate plan returns were almost 6 percent through May, “which is near their annual targets of 7.5 percent to 8.0 percent,” Wozniak said. “While asset returns have been good, they have been offset by declining interest rates, resulting in higher liabilities and lower funded status.”

The rate at which companies discount future obligations fell 14 basis points, or 0.14 percentage point, to 4.28 percent, BNY said. Plan liabilities are calculated using the yields of long-term investment-grade bonds. The yield to maturity on bonds in the Bloomberg U.S. Corporate Bond Index fell to 2.96 percent yesterday from 3.26 percent at the end of 2013.