Higher interest rates in December enabled typical U.S. pension plans to finish both the month and the full year in better shape than they were at the beginning of both periods, according to BNY Mellon Asset Management, which tracks the health of the pension plans through its BNY Mellon Pension Liability Indexes. Higher interest rates decrease the value of plan liabilities and bonds.

For the month of December 2007, the typical pension plan improved its status by 0.2 percentage points as higher interest rates helped to drive down the value of liabilities 0.6 percentage points, which more than offset the 0.4 percentage-point decline in assets at the typical U.S. plan. For the entire year, the typical moderate risk pension plan in the U.S. improved its funded status 4.5 percentage points, as assets increased 6.6 percentage points and liabilities rose 2.1 percentage points.

Beginning with this report, the monthly press release announcing the BNY Mellon Pension Liability Indexes will highlight the results on a "reporting basis," although BNY Mellon Asset Management will continue to track the results on a "market value basis," which is the way they have been reported until now. The "reporting basis" is designed to track the new funding rules adopted by the U.S. Treasury Department and financial reporting guidelines implemented in 2007 by the Financial Accounting Standards Board (FASB). The "market value basis" estimates the market value of liabilities, which is especially relevant for frozen and terminating plans.

"The 2007 liability return on a reporting basis at 2.1 percentage points is quite a bit less than the 2007 liability return on a market value basis at 9.3 percentage points," said Peter Austin, executive director of BNY Mellon Pension Services. "This reflects the 60-plus basis point widening in corporate yield spreads. Treasury yields declined about 30 basis points, while long high-grade corporate yields increased more than 30 basis points during the year."

Austin added, "Financial statements permit high-grade corporate yields for discounting, so the reporting basis is more important to corporations with ongoing pension plans, while the market value basis reflects the estimated cost to annuitize liabilities."