Monthly Retirement Update
Retirement Update – January 2020
- Discount rates were quiet in December, ending the month up slightly from November, but still much, much lower than they were at the end of 2018.
- Equity markets posted a solid month to wrap up an outstanding year. Fixed income investments were generally flat or down for the month but up substantially for the year.
- Funded status movements would likely be small but positive in the month of December, depending on equity allocations. The year-over-year funded status change is most likely small for most plans.
December 2019 Summary
With discount rates up slightly and equities posting another strong month, December was a pleasant end to a turbulent 2019 for pension sponsors. Most plans will have seen modest improvements in funded status in December, with both discount rates and equity investments providing light tailwinds. But the full year tells a different story; while the financial headlines were all about the strong stock market in 2019, the decline in discount rates was just as significant; many plan sponsors will find they barely made up any ground in 2019, despite strong equity returns.
Discount Rates & Asset Returns
Discount rates increased 0.09% in December. However, due to decreasing rates throughout most of 2019, current rates are still down 1% since year end 2018. The FTSE pension discount index finished December at 3.22%, the highest it has been since July.
Emerging market equities rebounded strongly over the month celebrating the phase one U.S.-China trade deal and market optimism ahead. Developed equities also increased, and interest rates stayed relatively unchanged as global central banks held rates steady. Positive outlook on global economic growth drove down the dollar and longer-dated treasuries.
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Q: Is 2020 going to be a good year to look at doing a lump sum cashout window?
A: Generally, we expect that plans with plan years starting on January 1 would have been better off doing a lump sum cash out window in 2019 than in 2020. With the large drop in interest rates that occurred during 2019, there were significant opportunities for savings in 2019 that we do not expect to repeat in 2020. However, certain plans will still benefit from such a program. For example, plans with liability-hedging investments supporting their terminated vested liability could “lock in” their high asset values now by cashing out participants and liquidating this part of the portfolio to pay benefits. This option is particularly attractive to plans paying capped Variable Rate Premiums to the PBGC; by reducing the plan headcount, significant PBGC premium savings can be recognized even in a low interest rate environment. Additionally, off-calendar plan years that start in May or June might still be able to capture some of the benefits of the 2019 interest rate drop.
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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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