(December 3, 2013) — A typical US corporate pension plans’ funded ratio improved to 93% as of end of November, a record high since October 2008 and up 19% year-to-date, according to Mercer.
The report also found a correlating decline in the total asset shortfall—$138 billion from $185 billion a month ago. This figure was significantly lower than Mercer’s estimated deficit of $557 billion as of December 31, 2012.
Such development was attributed to rising interest rates that helped lower liabilities for pension plans sponsored by S&P 1500 companies, Mercer said. It reported a 15 basis point increase in the corporate discount rate—from 4.45% to 4.59%.
“This potentially opens up opportunities to manage pension risk that may not have been practical a year ago, such as annuity buyouts or cashout offers to participants,” said Jonathan Barry, a partner in Mercer’s retirement business. “We are seeing a lot of plan sponsors get organized now to address the legal, administrative and compliance reviews that are needed so they can move ahead with a pension-risk transfer exercise in 2014.”
BNY Mellon Investment Strategy & Solutions Group reported similar findings for November, with assets increasing 0.4% and liabilities falling a total of 1.8%.
“Corporate bond yields have resumed their upward march, following a pause in October,” said Jeffrey Saef, managing director at BNY Mellon. These improvements in funded ratio due in part to a higher discount rate has resulted in “more plan sponsors reducing their exposure to market volatility.”
The Mercer report estimated S&P 1500 pension plans’ aggregate assets at $1.84 trillion and liabilities at $1.98 trillion as of November 30, 2013.
Public pension plans, on the other hand, managed to hold steady, BNY Mellon concluded. A typical public defined benefit plan in November failed to surpass its annualized 7.5% return target.
Endowments and foundations experienced some improvements in net returns with plan assets increasing 0.7%, according to BNY Mellon. Their success was found in holdings in hedge funds and private equities.
However, despite good news, T. Rowe Price advised investors to be wary of the bull market next year: “Investors should temper their expectations as the strong performance in many of these markets over the last five years is unlikely to be matched during the next five years.”
Related content: A Third of US Public Plans Pessimistic About Funding, US Corporate Plans Reach 91% Funded Status, BofAML: Keep Hold of Your Equities Until at Least 2014, US Pension Plans’ Route to the Glide Path Endgame