Equity returns of 15% or higher would usually be cause for celebration among corporate pension plan investors. However, despite these strong returns, many plan sponsors have seen a decline in their funded ratios during 2019. This is mainly attributable to falling interest rates, causing the value of liabilities to increase faster than assets for many. This is a continuation of a frustrating cycle that plan sponsors are all too familiar with: strong equity returns offset by rapidly rising liability values.
On August 8th, former pension plan participants filed a lawsuit aimed at both the retirement committee of the plan sponsor, Community Health Systems, Inc., and the target date provider, Principal Global Investors, LLC, among other Principal entities. This lawsuit highlights the need for plan sponsors to review their passive index funds on a regular basis.
August proved to be a difficult month for equity markets as continuing trade tensions and weakening economic data triggered a flight to safety. As a result, interest rates fell across the curve more so at the long end which caused a portion of the yield curve to invert. Emerging market equities were hurt the most in this off-risk environment. Given the above, funded status for plans that were not hedged likely decreased significantly for the month.
PBGC premiums for 2019 are coming due soon, and there are two options to determine the interest rate used when calculating a plan’s premium based on underfunding. One option will reduce the premium this year, but at the likely cost of a higher premium next year.
Following up on what was a very positive month of June for most plans, July proved to be fairly uneventful. Modest movement in discount rates with generally small equity gains should leave most plans in more or less the same funded position at the end of the month as they were in at the end of June. Year-to-date performance should look good for most plans.
If the recent glut of superhero movies has taught us anything, it is that with great power comes great responsibility. Most pension plan fiduciaries tend to focus their responsibilities on plan assets. They exercise their power by monitoring asset performance, investment fees, and service provider expenses. These fiduciaries also have the responsibility to maintain the data and the liabilities associated with that data.
Is holding less equity as a plan gets closer to its funding goal the right thing to do? We decided to dig into this question to see what the potential outcomes could be for plan sponsors and see how what we call structured equity could factor into the answer.
Public sector and church pension plan sponsors face unique but similar financial challenges. This paper covers an alternative approach to constructing investment portfolios that can better help meet their needs by seeking equal to or greater investment returns with less funded status volatility than conventional investment strategies.
June was another period of volatile market movements as rates continued to fall off the back of the Federal Reserve’s decision to leave base rates unchanged – for now. Meanwhile global equity markets had a strong month, with U.S. equity markets in particular reaching all-time highs. For most plans this would have led to an improvement to their funding level, contributing to positive year to date performance. Following a difficult May this month was certainly a welcome relief.
2019 had been a fun ride for pension plan sponsors through the start of May, however the past few weeks have been less than fun. Year-to-date performance is still likely to be positive for most plans, but falling interest rates and negative equity returns during the month likely took a big chunk out of 2019’s gains. There’s no silver lining to be found here, as May was a bad month all around for pension plans.