We believe we are still in the Stable phase of the market, although recognize that short term volatility is likely to occur after such a strong run in markets.
To kick-off 2020, pension plans witnessed discount rates reversing course and falling further to all-time lows. Volatility returned to equity markets after months of relative calm. International equities were down for the month over concerns of the coronavirus impacting the global economy. Plans heavily interest rate hedged should see a stable funded status but many more plans will see a decline in funded status of a few percentage points. The good news is that markets have already started to rebound thus far in February.
In 2019 plan sponsors witnessed a familiar, albeit more extreme, combination of returns that has also been the theme of the entire previous decade. Equities rallied, long term interest rates fell, and funding levels didn’t increase to levels that plan sponsors expected for a typical pension plan. However, some sponsors utilized equity derivatives to make the investment portfolio work harder while managing risks more efficiently, and consequently saw their plans’ funded ratios materially increase over the same time period.
2019 turned out to be a fruitful year for equities with the S&P500 achieving record highs and delivering more than a 28% return for the year. However, 2019 returns were boosted by a low starting point at the beginning of the year following the 2018 “Christmas Crunch”.
With discount rates up slightly and equities posting another strong month, December was a pleasant end to a turbulent 2019 for pension sponsors. Most plans will have seen modest improvements in funded status in December, with both discount rates and equity investments providing light tailwinds. But the full year tells a different story; while the financial headlines were all about the strong stock market in 2019, the decline in discount rates was just as significant; many plan sponsors will find they barely made up any ground in 2019, despite strong equity returns.
We believe we are in the Stable phase of the market; we saw reduced equity volatility in November compared to the past few months, but the lower liquidity around the Christmas period could lead to a return of some volatility.
Market Activity Source: LIMRA Secure Retirement Institute Total pension buyout sales surpassed $7.7 billion in the third quarter of 2019, an increase of 23% compared to the third quarter of 2018. A total of 111 buyout contracts were sold in Q3, bringing 2019 sales to...
River and Mercantile Solutions (R&M), a leading institutional investment and actuarial advisor, is proud to announce it has been named a Best Place to Work in Money Management for 2019 by Pensions & Investments.
Long-term corporate bond yields stayed relatively flat for the month and have remained relatively flat since September. During November, increased confidence in a China/US trade agreement pushed US stock prices higher. With liabilities discount rates remaining level and an increase in US equity markets, most plans should have seen a slight increase in funded status for the second month in a row.
In May of this year, we released our view on the current state of interest rates including the specific drivers that could affect rates through the end of 2019. Over the past seven months, a lot has happened with the various forces that have influenced interest rates globally. This quick update summarizes those forces and provides our thoughts on what might happen based on where we are today.