The funded status of the typical U.S. corporate pension plan fell 2.3 percentage points in May to 86.9 percent, erasing nearly half of the gains achieved since the beginning of the year and ending an eight-month period of steady improvement, according to monthly statistics published by BNY Mellon Asset Management.    

"The sudden reversal in May reflected the impact of lower Treasury yields as investor concern grew regarding the European sovereign debt situation," said Peter Austin, executive director of BNY Mellon Pension Services in a statement. "We have experienced a very good run in funded status improvement since August 2010, and many plan sponsors were turning their attention to establishing asset allocation targets based on continued improvement in plan funding levels."  

The decline in the funded ratio was driven by falling interest rates, as the Aa corporate discount rate dropped 16 basis points to 5.34 percent, according to the BNY Mellon Pension Summary Report for May 2011. Plan liabilities are calculated using the yields of long-term investment grade corporate bonds.  Lower yields on these bonds result in higher liabilities.

In addition, assets in the typical corporate plan in May fell 0.3 percent, as the U.S. equity markets lost 1.1 percent and international developed stock markets dipped 3.0 percent, according to the report.

Austin said that the results show that the U.S. still faces serious economic challenges such as inflation. As a result, many plan sponsors may revisit their asset allocation strategies to determine how to protect the gains made over the past several months.