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The funded status of the typical U.S. corporate pension plan hit a record low in July, according to separate reports from BNY Mellon and Mercer.

The average funded status dropped 2.9 percentage points to 68.7%, reports BNY Mellon, while the latest figures from Mercer show that the aggregate deficit in pension plans sponsored by S&P 1500 companies grew US$146 billion during July, to a record high of US$689 billion.

Both firms says the decrease was driven by a sharp spike in liabilities. According to BNY Mellon’s Pension Summary Report for July 2012, liabilities increased 5.5%, outpacing a 1.2% gain in assets at the typical corporate plan.

The rise in liabilities resulted from the 34 basis-point drop in the AA corporate discount rate to 3.64%, says BNY Mellon.  Plan liabilities are calculated using the yields of long-term investment grade bonds; lower yields on these bonds result in higher liabilities.

“The continuing uncertainty regarding the eurozone and lack of a coordinated response to the debt issues in Europe continue to send investors into bonds that are perceived to be a safe haven,” explained Jeffrey B. Saef, managing director with BNY Mellon Asset Management, and head of the BNY Mellon investment strategy and solutions group. “As long this uncertainty remains, we expect to see very low interest rates, which will continue to pressure plan sponsors.”

Meanwhile, Mercer’s data found that although U.S. equity markets rose 1.4% during July, discount rates fell another 30 to 55 basis points resulting in liability increases ranging from 3% to 11%. The continued fall in U.S. Treasury yields and the narrowing of corporate bond credit spreads led to discount rates hitting a new all-time low for the third consecutive month.

“This record deficit proves that pension funded status volatility is showing no sign of abating,” said Jonathan Barry, a partner with Mercer’s retirement, risk and finance consulting group. “As we have turned past the halfway point for the year, sponsors really need to take a close look at how these deficits might impact their 2013 financials. Absent a significant rise in rates over the next five months, sponsors will be looking at higher year-end balance sheet deficits and P&L expense for 2013.”

Saef noted that while portfolios for U.S. plan sponsors have performed well, with assets rising more than 7% during the first seven months of the year for the typical plan, plan sponsors should remain cautious.  “Hitting a return target isn’t enough these days if you’re not keeping up with the growth in liabilities,” he said.

© Copyright 2014 Rogers Publishing Ltd. Originally published on benefitscanada.com

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