Administration July 8, 2014

June Brings Rebound for Pension Index

July 8, 2014 (PLANSPONSOR.com) – The Towers Watson Pension Index shows a 1.2% increase in the funded status of defined benefit (DB) plans during June, resulting in an index score of 75.1 as of June 30.
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Strong equity returns and a slight increase in bond yields were factors in moving the index up in June, says Towers Watson. While the June increase reverses a three-month decline in funded status, the index remains down 4% for 2014.

With investment returns, the equity portfolio for the index’s hypothetical benchmark pension plan returned 2.4% in June and is up 6.5% for the year to date. Yield decreases thus far in 2014 have resulted in stronger fixed-income returns.

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For interest rates, long yields increased slightly in June, but remain down about 50 basis points for the year. The credit spread (also known as the incremental yield on long corporate versus long government bonds) remains in the typical range of 90 to 100 basis points.

The index’s hypothetical DB plan is invested in a 60% equity and 40% fixed-income portfolio. That portfolio recorded a 1.4% return for June. The index also tracks two alternative investment portfolios with different mixes of equity and fixed income. Monthly returns on the 20% and 60% fixed-income portfolios were 1.9% and 1%, respectively.

Towers Watson also tracks a second version of the 60% fixed-income portfolio of the hypothetical plan, which incorporates longer duration fixed-income investments. That portfolio returned 0.9% for the month. The decrease in long bond yields so far in 2014 has made this portfolio the year’s return leader, following a lagging performance in 2013, according to Towers Watson.

The index notes that pension liabilities, as defined for U.S. accounting purposes, are typically measured based on yields on high quality corporate bonds as of the measurement date. Towers Watson uses its RATE:Link methodology, which matches those corporate yields to projected cash flows. Using this methodology, the benchmark discount rate was determined to be 4.33%, which is up two basis points for the month.

Similar to bond prices, the index notes that values for pension obligations move in the opposite direction of interest rates. Towers Watson’s liability index, which is based on projected benefit obligations, increased 0.2% for June, and reflects the net effects of interest accumulation and the increase in the discount rate.

The Towers Watson Pension Index is designed to provide an indicator of capital market effects on DB plan financing. Individual plan results vary due to factors such as portfolio composition, investment management strategy, liability characteristics and contribution policy.

More details about the June index can be found here.

Administration July 8, 2014

S&P 1500 Pension Deficit Improves in June

July 8, 2014 (PLANSPONSOR.com) – The funding for defined benefit (DB) retirement plans sponsored by Standard & Poor’s (S&P) 1500 companies showed a slight improvement during June, according to a recent analysis from Mercer.
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The consulting firm finds that the estimated aggregate funding level for these defined benefit plans increased by 1% in the month of June, ending the second quarter of 2014 with a funded ratio of 85%. Small gains in equity markets accompanied by increases in interest rates used to calculate corporate pension plan liabilities drove the improvement in funded status.

While the collective estimated deficit of $330 billion (as of June 30) was down $13 billion from the estimated deficit of $343 billion (as of May 31), it has increased by $94 billion from the deficit of $236 billion seen at the beginning of the year, says Mercer. This translates into a year-to-date decrease in funded status of approximately 3%.

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The analysis also finds that U.S. equity markets earned about 1.9% during June based on the S&P 500 Index. Typical discount rates for pension plans as measured by the Mercer Yield Curve increased by 1 basis point (BPS) to 4.07%, a slight improvement since last month’s low point, which drove liabilities downward.

“Even with the very positive returns we have seen in most equity markets this year, overall, U.S. corporate pension plans have lost ground since the beginning of the year due to a 50- to 60-basis-point drop in discount rates,” says Jonathan Barry, a partner in Mercer’s Retirement business in New York.

Barry explains that, since the market downturn in 2008, there have been a number of chances to lock in funded status gains but that many plan sponsors missed out on those chances. He adds, “Now we are seeing a big uptick in the number of sponsors looking to manage this volatility and avoid the ups and downs of the market. In particular, 2014 and 2015 look to be big years for sponsors to execute on cash-out programs for former employees, which can serve to shrink the size of the plan and lower various costs associated with managing pension programs.”

Mercer estimates the aggregate funded status position of plans operated by S&P 1500 companies on a monthly basis. The estimates are based on each company’s year-end statement and by projections to June 30 in line with financial indices. This includes U.S. domestic qualified and nonqualified plans and all nondomestic plans.

The estimated aggregate value of pension plan assets of the S&P 1500 companies as of December 31, 2013, was $1.80 trillion, compared with estimated aggregate liabilities of $2.03 trillion. Allowing for changes in financial markets through June 30, changes to the S&P 1500 constituents and newly released financial disclosures, at the end of the first half the estimated aggregate assets were $1.88 trillion, compared with the estimated aggregate liabilities of $2.21 trillion.

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