Rising interest rates lowered corporate pension liability estimates in April, improving the average funding rate to 90.1 percent, a 2.9 percent increase, according to BNY Mellon Investment Strategy and Solutions Group.
The average corporate discount rate jumped 20 basis points during the month, to 4.06 percent, which accounted for nearly all of the overall funding improvement. Increased value of plan investments accounted for 0.7 percent of the overall 2.9 percent improvement.
"Corporate plans are seeing the benefits of a slight rise in interest rates, which have increased for three consecutive months and are pushing down liabilities," said Andrew D. Wozniak, head of fiduciary solutions, ISSG.
Recommended For You
Plan liabilities, or estimates of future obligations, are calculated using yields on long-term investment grade bonds. Higher yields result in lower liabilities, according to BNY Mellon release.
Earlier this year, Moody's estimated that average corporate pension funding levels fell a full 8 percent in 2014, to 78 percent, due largely to the average discount rate falling to 4 percent, from 4.8 percent the previous year. New mortality tables released by the Society of Actuaries also increased the cost of liabilities, weighing on funding levels.
And a sampling of more than 400 corporate plans by Towers Watson found that funding losses last year dropped average levels by 9 percent, wiping out all of 2013's gains.
Corporate pension plans are one area of the economy that will welcome rising interest rates. Analysts from Credit Suisse have estimated that a 1 percent increase in interest rates could push the funding level of a company like Caterpillar Inc.'s up 15 percentage points.
In its latest assessment of plan performance, BNY Mellon also said public defined benefit plans exceeded their target return in April by 0.9 percent, as assets returned 1.5 percent, led by emerging market equities. Year-over-year, public plans still remain below their return target by 1.8 percent.
Northern Trust, which also tracks pension performance, released data showing corporate pensions returned 2.8 percent in the first quarter of 2015, helped by international equities, the best performing asset class, which returned 4 percent for the quarter.
Improving U.S. Treasury yields also lifted the plans.
For the five-year period as of March 31, 2015, corporate pension plans returned 10.2 percent, compared to 10 percent for public pension funds, and 8.8 percent for foundations and endowments.
Hedge funds and real estate each returned about 3 percent for the first quarter, according to Northern Trust.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Nick Thornton
Nick Thornton is a financial writer covering retirement and health care issues for BenefitsPRO and ALM Media. He greatly enjoys learning from the vast minds in the legal, academic, advisory and money management communities when covering the retirement space. He's also written on international marketing trends, financial institution risk management, defense and energy issues, the restaurant industry in New York City, surfing, cigars, rum, travel, and fishing. When not writing, he's pushing into some land or water.
