The ability of U.S. corporate defined benefit plans to fund their obligations fell in August, while public plans, foundations and endowments saw a rise in their so-called funded status.
According to the BNY Mellon Investment Strategy and Solutions Group, the drop in corporate pension funding was tied to geopolitical tensions that put downward pressure on interest rates, leading to higher liabilities.
The monthly BNY Mellon Institutional Scorecard indicated that typical corporate plans saw a drop of 0.7 percentage points to 90.1 percent. Liabilities rose 3.3 percent, while the return on assets came in at 2.6 percent.
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This latest drop brought the funded status of corporate pensions down 5.1 percent from its December high of 95.2 percent, according to the scorecard.
Higher liabilities in August were due to a 21-basis-point drop in the Aa corporate discount rate to 4.11 percent over the month. Because plan liabilities are calculated using long-term investment grade bond yields, liabilities rise if those bonds experience lower or flat yields.
"Investors appeared to be torn between concerns about increased geopolitical tensions and optimism about the U.S. economy," said Andrew D. Wozniak, head of fiduciary solutions, ISSG. "Geopolitical concerns resulted in more interest in longer-term corporate credit and government bonds, sending interest rates lower. Optimism about the economy helped to push equities and other risk-based assets higher."
The news was positive, however, for public plans, endowments and foundations. Public defined benefit plans not only met but surpassed their August target by 1.3 percent, with assets increasing by 1.9 percent. ISSG said that year-over-year, public plans have exceeded their target by 7.6 percent.
August real return for endowments and foundations was a shade lower, at 1.1 percent, with assets returning 1.8 percent. Private equity, which makes up 15 percent of asset portfolios, and real estate investment trusts, which stand at 8 percent, brought in 2.5 percent for the month.
ISSG said that year-over-year, foundations and endowments are leading the inflation-plus-spending target by 6.3 percent.
Also read: Pension funding falls in July
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