Fixed Income Allocations Suppressed Potential Losses for ERISA Pension Plans

Investment returns were down significantly for institutional plan sponsors in the first quarter of this year because of the effects of the coronavirus pandemic on financial markets. The median plan in the Northern Trust Universe finished with a loss of 11.6% for the three months ending March 31.

Of the three institutional segments tracked by Northern Trust, corporate Employee Retirement Income Security Act (ERISA) pension plans performed the best with a reported median return of -8.1%, while public funds had a median return of -12.6% and foundations and endowments produced a -11.6% median return in the first quarter.

Mark Bovier, regional head of Investment Risk and Analytical Services at Northern Trust, notes, “U.S. equity programs, the largest allocation in most plans in the Northern Trust Universe, had a median return of -22.1% in the quarter, while the median return for international equity programs was -22.9%. The U.S. equity program’s past quarter median return was the lowest since the universe posted a median return of -23.1% during global financial crisis in 4Q 2008. The international equity program’s quarterly median return is the lowest this century.”

The U.S. fixed income program universe median return was 0.3% for the quarter. Bond prices rose during the quarter, pushing down yields. The 10-year Treasury Note yield fell 1.9% to 0.7% during the quarter.

Northern Trust points out that ERISA plans benefited from a large allocation to fixed income securities. U.S. fixed income exposure was 40.4% for the median ERISA plan at the end of the first quarter, a 4 percentage-point increase from the end of last year. The median U.S. equity allocation for ERISA plans declined almost 5 percentage points from the end of last year, to 23.6% at the end of the first quarter. While U.S. equity exposure remains significant for the Northern Trust-tracked plans, it is down from 33.9% five years prior. International equity median exposure was 7.6% in the first quarter.

Public fund plans have the highest allocations to equity, with the median U.S. equity allocation at 30.3% in the first quarter, down almost 4 percentage points from the prior period, and international equity median exposure at 13.9%. The median exposure to U.S. fixed income for public funds was 27.1%, an increase of more than 3 percentage points over the prior quarter and a change resulting from the equity market sell-off during the quarter.

Foundation and endowment plans had a median U.S. equity allocation of 22.8% in the quarter, down more than 5 percentage points from the end of last year. International equity median exposure was 9.1% and the median exposure to U.S. fixed income was 11.8%. Alternative assets are widely used in the foundation and endowment universe, with private equity and hedge fund median allocations at 15.8% and 11.3%, respectively, as of quarter end.

The Northern Trust Universe tracks the performance of approximately 300 large U.S. institutional investment plans, with a combined asset value of approximately $1 trillion, which subscribe to performance measurement services as part of Northern Trust’s asset servicing offerings.