Retirement Update – December 2018
- Discount rates were flat for the month, but still up materially since the beginning of the year.
- Investment returns were mostly up, however an up and down month for equities.
- Funded status should have remained neutral to slightly positive since the beginning of the month depending on the asset allocation.
November 2018 Summary
November was a very bumpy ride. The market ended up for the U.S. and emerging markets but international developed markets were slightly down. With a flat discount rate, most plan sponsors with a diversified portfolio may have seen a slight increase in funded status at month’s end, but would have seen a bit of volatility intra month.
Discount Rates & Asset Returns
After increasing for two straight months, discount rates remained the same from last month and remain the highest they have been all year. Rates are much higher than rates at this time last year and are up nearly 0.85% since the end of 2017.
Emerging market equities were the best performing equity sector increasing over 4%. U.S. markets continued to increase while developed foreign markets were flat. Long term interest rates decreased while short term rates increased. Credit spreads widened causing more risky bond markets like high yield to decrease in value. Lastly, oil prices substantially fell during the month.
What’s New at R&M?
R&M Directors Author Pieces on Pension De-Risking, Pension Investing, and Equity Protection
Pension De-Risking – The Next Evolution in Reducing Funded Status Risk
by Dave Rosenblum
There has been an evolution of pension plan de-risking over the years, giving us 3 different versions. Many plan sponsors have avoided moving more quickly to de-risk using strategies 1-3 because of the negative impact that each of these can have on a sponsor’s reported profits as well as expected cash contributions to close a deficit. We are now poised for de-risking version 4.0, in which plan sponsors will utilize modern risk management tools to significantly reduce funded status volatility while maintaining expected returns.
Pension Investing – Next Generation of Glide Paths
by Tom Cassara
Pension plan sponsors, especially those with frozen pension plans, have spent significant time deciding on the most appropriate balance between growth (return seeking/equities) and hedging (liability matching/long-term bonds) assets to meet their objectives. For most, the ideal goal is to fully fund the pension plan through a balance of investment performance, cash contributions and a rising interest rate environment while not subjecting themselves to higher than desired funded status risk.
Equity Protection – is now the right time?
by James Walton & Joe Anzalone
Recent bouts of volatility have made headlines and questions are being asked of one of the longest equity bull markets in history. However, strategies to protect against declines in the equity market have been steadily getting cheaper and are now at multi year lows…
Q: The recent market volatility has me concerned, what are things I can do to help mitigate the volatility?
A: There are a number of items that can be done to help mitigate investment volatility. One of the largest items is reviewing your asset allocation at the highest level and making sure you are comfortable with the overall debt/equity (hedging/growth) allocation. Diversifying your equity portfolio can help as well. Items like U.S. vs Non U.S., small vs. large capitalization, strategies focused on lower volatility and derivative based strategies are all risk diversifiers.
But we can’t caution enough to make sure you understand the risk inherent in your plan. The best strategy is to have a strategy. Make sure you know how your pension plan will react to changes in discount rates and economic markets. Then have a plan in place to either mitigate the risk now or to be able to make changes quickly in the future if times change. Some of the best results occur when plan sponsors can act quickly to take advantage or to protect themselves in a changing economy.
Have a question for R&M? Please submit it to firstname.lastname@example.org 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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