Monthly Retirement Update

Retirement Update – August 2019

Aug 6, 2019 | Categories, Defined Benefit, Industry Updates, Investment

Key Takeaways:

  • Discount rates were down slightly in July
  • US Equities posted modest returns, with small losses on international stocks
  • All else equal, July was a quiet month for pensions, with little expected movement in most plans’ funded status based on rates & returns

July 2019 Summary

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.

Discount Rates & Asset Returns

Discount rates continued to decrease in July, dropping another 0.07%. Current rates are now down 0.78% since year end 2018 and are 0.66% lower than rates from this time last year. The FTSE pension discount index finished July at 3.44%.

Global equity markets increased slightly in July. The US market increased by 1.5%. Developed and emerging international market investments experienced negative returns of -1.3% as a result of the dollar appreciating strongly. The Fed lowered interest rates at the end of July and most fixed income sectors saw minor increases in value. Core bonds were up 0.2% while long credit increased by 1.2%.

What’s New at R&M?

R&M Managing Director featured in PLANSPONSOR

Managing Director, Tom Cassara, discusses his article, Pension Investing: An Alternative Strategy for Public and Church Defined Benefit Plans with PLANSPONSOR.

Click to read more

Are you a Plan Sponsor Superhero?

Director, Dan Atkinson and Associate Director, Sean McSweeney, explain how you can become a “Plan Sponsor Superhero” by making sure data updates don’t slip through the cracks in their most recent article.

Click to read more

Ask R&M!

Q:  If lump sums in 2019 are such a great deal for plan sponsors, does that mean that they are a poor choice for participants?

A: Not at all. Lump sums may or may not be right for any specific participant, but the fact that a 2019 lump sum will likely lead to a gain for the plan sponsor does not mean that a lump sum is a losing proposition for participants.

There are 2 primary reasons why plan sponsors will benefit from such a lump sum offering.

  1. The first is administrative expense savings. It costs the sponsor money to keep track of participants year after year, and the sponsor must pay annual premiums to the Pension Benefit Guaranty Corporation to insure the participants’ benefits in case the pension fund proves to be insufficient. Once a lump sum has been paid, these expenses go away. This is a benefit to the sponsor, but does not harm the participant.
  2. The second reason is interest rates. In general, plan participants probably aren’t too worried about how high or low corporate bond rates are day to day – but many plan sponsors are meaningfully impacted by the movement in these rates. When these rates are low (and have fallen during the year, as is the case YTD in 2019), it means that pension liabilities will be high when they are reported at year-end. But if participants voluntarily leave the plan, via a lump sum payment, prior to year end, then this high liability never materializes on the plan sponsor’s balance sheet.

So how is the lump sum calculated? The IRS sets limits on the interest rates that can be used in calculating lump sums, as well as the mortality table utilized, which prevents sponsors from offering unfairly low lump sum amounts. Using these assumptions, the lump sum is equivalent to the defined annuity benefit (e.g. a life annuity starting at age 65). The lump sum can (but doesn’t always) include the value of any subsidies, such as an unreduced early retirement subsidy.

There are many factors for a participant to consider prior to electing to receive (or reject) a lump sum offer. While plan sponsors will likely avoid advising plan participants on what to elect, they may want to provide the facts, to better educate participants on how the lump sum is calculated. If you are considering a lump sum offer, but would like more information, we’d be happy to discuss the details and options with you, so that participants are able to make a more informed decision, and you are able to execute a more successful lump sum window.


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

R&M Newsletter

Subscribe to receive news and updates in the defined benefit, defined contribution, or investment areas of the retirement industry.