Monthly Retirement Update

Retirement Update – February 2019

Feb 7, 2019 | Defined Benefit, Industry Updates

Key Takeaways:

  • Discount rates continued with meaningful decline, nearly replicating the drop from December.
  • Equities were on the rise, making up much of December’s loss. Fixed income/hedging assets were up as well.
  • Funded status likely improved during January, with most improvement seen by those heavily invested in equities.

January 2019 Summary

2019 is off to a great start for the vast majority of pension plans. Equities saw increases across the board, with small cap equity leading the way with returns of over 11% for the month, and international equities bringing up the rear with returns of over 7%. Falling rates made good returns a necessity in order to maintain funded status, but just about any mixture of equity and fixed income investments was enough to see some improvement. The only plans worse off now than they were on New Year’s Day are those that are heavily invested in cash or cash equivalents, as there would be little investment return to offset the discount rate drop.

Discount Rates & Asset Returns

In January, discount rates continued to decline, dipping another 0.15%. However, current rates are in line with rates from last summer and are up over 0.28% from this time last year.

Global equity markets saw a rebound from December. US equity markets increased 8.6%, international developed markets by 6.6%, and emerging market equities by 8.8%. Interest rates decreased slightly across the curve and credit spreads narrowed, providing for positive returns in fixed income and especially in more risky markets like high yield. Oil prices increased during the month.

What’s New at R&M?

R&M Releases Their Q3 Pension Plan Annuity Purchase Update

Through the first three quarters of 2018, pension buy-out sales continue on a record-breaking pace. Q3 sales totaled $6.3 billion which brings year to date sales to $15.9 billion, compared to $11.9 at this time last year. If Q4 sales match last year, total 2018 sales will exceed $27 billion.

Click to read more

Ask R&M!

Q: PBGC premiums continue to be a drag on my plan. After a down year for assets, PBGC has increased the variable premium rate by over 13%, from 3.8 to 4.3 percent of my plan’s shortfall! And yet the discount rate really hasn’t changed that much, despite rising rates over the course of 2018. What can I do to reduce this “tax” that is paid to the PBGC?

A: The key part to this question is the italicized portion dealing with discount rates. While all sponsors will face the 13% increase in the variable premium rate (up to 4.3% of the plan’s shortfall), not every plan uses the same discount rate. Roughly half of single employer plans elect to use the “Alternative Method” for determining variable premiums, which results in the situation you’re describing. To get the full and immediate advantage of the discount rate increases observed over 2018, a plan needs to be using the “Standard Method”. A change to the method selected can be made once every five years. For a fairly typical underfunded plan you may be able to save nearly 5% in 2019 variable rate premiums simply by changing the PBGC premium methodology. This won’t apply to every plan, but it will be useful to understand how and when it may apply, so that you can be ready to make the change and save on premiums this year.


Have a question for R&M? Please submit it to 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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