High-quality corporates boost pension fund returns

The rising rates of high-quality-corporate-bond yields are helping pension funds offset the impact of the stock market downturn, according to the latest research from Mercer LLC’s Financial Strategy Group in New York. Pension funds represented by the largest U.S. companies are estimated to be about 75% fully funded, but the good news is, it could be worse if it weren’t for the fact that corporate-bond yields have gone up in stride with the stock market downturn. “Some people tend to forget that with pension plans, it’s not all about the assets,” said Adrian Hartshorn, a member of Mercer’s research group. As actuaries calculate the discount rate of future cash flow in current dollars, a rising yield on AA-rated corporate bonds equals a lower pension funding liability. For example, according to Mr. Hartshorn, a 1% change in high-quality-corporate-bond yield alters the value of a pension plans liability by 10% to 15%. Thus, when the corporate-bond yield climbed to 7% at the end of January, from 6.3% at the end of December, the pension fund liability was reduced by 7.5% to 10%, he said. “On the asset side, the pension funds have lost, but they have gained on the liability side,” Mr. Hartshorn added.