Rising rates should provide continued good news for many plans, especially those which are more heavily invested in equities, since liabilities will have fallen while assets grew modestly. The FTSE (formerly Citi) Pension Liability Index is now at its highest month-end value since January 2017. This an ideal time for plan sponsors who are in the process of an annuity purchase as they are able to capitalize on the high rates.
Flat discount rates and equity gains will result in small funded status gains for plan sponsors during May. Year-to-date plans should be ahead of where they were at the beginning of 2018 due to rising interest rates. Discount rates continue to be the driving factor in funded status changes so far in 2018.
The rise in discount rates during the month will decrease liabilities for most plans. This, combined with a flat US equity market across the month, will have the majority of plans seeing an improved funded percentage.
The small drop in discount rates during the month will increase liabilities for most plans, while the generally negative equity returns will ensure that investments don’t make up for this liability increase. Neither the discount rate movement nor the asset performance was catastrophic, but the majority of plans will likely see a drop in their funded percentage.
Plan sponsors should see little change in funded status as of the end of February. Negative equity returns offset decreasing liabilities. Discount rates rose by over 0.2% in February to their highest level since April 2017. At the same time, the 3.7% decline in the Russell 1000 index of US stocks represented to worst monthly performance for equities since January 2016, when stocks fell by 5.4%.
Between an uptick in discount rates and strong equity performance, plan sponsors should see a nice bump in funded status as of the end of January. Discount rates recovered from the dip they took at the end of December. Equities had a solid month with US and international equities up around 5% and emerging markets over 8%.
Pension plan funded status likely took a small hit in December. The Citi Pension discount rate dropped 18 basis points during December implying a 2-3% increase in liabilities. This was offset by favorable returns albeit generally below 2%. Plan funded status for calendar 2017 months should be at least modestly improved for most plans; how much will depend on asset allocation.
Most plans will continue to see funded status increases as equities continue to rally while discount rates remain steady. Even with discount rates down YTD, plans will most likely be better funded come year-end barring any drastic changes in rates or returns during December.
For most plans, October was a good month with funded status improvements driven by assets posting decent returns and liabilities remaining fairly flat. Year-to-date most plans have seen some funded status improvements due to the strong returns in the markets despite falling discount rates.
August 2017 Download a PDF version of this article… Download an Excel version of this article… What Happened in August 2017? Market Returns Interest Rates The discount rate on the Citigroup Pension Liability Index (CPLI) fell from...