Retirement Update

Retirement Update – April 2019

Apr 4, 2019 | Industry Updates

Key Takeaways:

  • Discount rates materially fell in March.
  • Equities rose as a result of strong earnings results, the Federal Reserve’s views on rate hikes, and a growing confidence in a China/US trade agreement.
  • Funded status likely decreased during March as a result of the decline in discount rates.

March 2019 Summary

The month of March gave back some of the funded status gains since the beginning of the year. For most plans, gains since the beginning of the year should still be up by about 1% to 2%. Equities added to 2019’s strong returns, with global equities up over 10% year to date. The fall in discount rates and the corresponding increase in liabilities remind us of the impact that changes in rates have on a pension plan’s funding status.

Discount Rates & Asset Returns

After a slight increase last month, discount rates decreased significantly in March, dropping 0.28%. Current rates are now down 0.39% since year end 2018 and are 0.13% lower than rates from this time last year.

Global equity markets increased in March. The US led the way with a 1.5% return while international developed markets increased by 0.6%, and emerging market equities by 0.8%. Interest rates decreased sharply after the Fed meeting and a renewed concern about global growth. This provided strong positive returns in bonds, especially long dated segments.

What’s New at R&M?

River and Mercantile Featured in BenefitsPRO

Managing Director, Charlie Cahill, and Director, Michael Clark, shared with BenefitsPRO Magazine their strategies and actions for pension plan sponsors to consider during 2019.

Click to read more

Ask R&M!

Q:  We are concerned that equity markets may be reaching peak asset values, what should we be considering?

A:  There are a number of potential considerations.   First and foremost is to understand goals for both the funded status and risk level for a plan and plan sponsor.  For many plans, the goal is to reduce the funding gap through a combination of investment returns and cash contributions over time.  However this is to be accomplished without incurring excessive risk to the plan or plan sponsor.

With higher equity returns, a plan sponsor should consider if this is the right time to reduce the inherent investment risk in the pension plan.  This can be done by either shifting assets from their return seeking allocation to their liability hedging allocation.  An alternative would be to utilize equity derivatives to create a desired level of protection from material equity downturns.  There are numerous ways to use derivatives to accomplish this that would include a zero premium design.

 

Have a question for R&M? Please submit it to usa@riverandmercantile.com and look for a possible answer in next month’s update!

SECURITY INDICES: This presentation includes data related to the performance of various securities indices.  The performance of securities indices is not subject to fees and expenses associated.  Investments cannot be made directly in the indices.   The information provided herein has been obtained from sources which River and Mercantile LLC believes to be reasonably reliable but cannot guarantee its accuracy or completeness.

CONFIDENTIAL:  For addressee use only, not to be disclosed to any other person without express consent from River and Mercantile LLC.  Past performance cannot be relied upon to predict future results.  River and Mercantile LLC is an investment advisor registered with the US Securities and Exchange Commission.

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