U.S. Pensions Enter 2014 in Best Shape in Years

One word of caution is here, but from a different report this week. A fresh report from TrimTabs showed that bond funds showed record outflows in 2013, but it also warned that only a tiny fraction of the inflows from the past five years has been seen.

This interest rate pressure might seem to hurt pension fund valuations on the surface, although rising interest rates will actually help fund future liabilities not yet on the books. In fact, BNY Mellon did show that rising interest rates lowered liabilities. It said:

The decline in liabilities was due to an eight-basis-point increase in the AA corporate discount rate to 4.93 percent. Plan liabilities are calculated using the yields of long-term investment grade bonds. Higher yields on these bonds result in lower liabilities.

BNY Mellon showed that the funded status of the typical U.S. corporate pension plan in December 2013 rose by 1.3 percentage points to 95.2%. This was the highest level since before the recessionary stock market crush — back to September 2008.

Assets for U.S. corporate plans were up by 0.8%, versus a drop of 0.6% in the liabilities. The funded status of the typical U.S. corporate plan rose by more than 18 percentage points in 2013. A growing number of plan sponsors are said to be reducing their exposure to market volatility.

Even public pensions performed better. The typical defined benefit plan in December saw excess return of 0.4 percent over its annualized 7.5 percent return target; public plan assets must earn at least 0.6% each month to keep pace with the 7.5% annual target.

BNY Mellon Investment Management claims some $1.5 trillion in assets under management. It has a keen insight on pension and endowment asset management trends.