Retirement Update – June 2019
- May was the most challenging month for pension plans so far in 2019.
- Discount rates fell more than 20 basis points.
- Equities lost in excess of 5 percent.
- Almost all plan sponsors should see a notable drop in funded status unless they are heavily hedged.
May 2019 Summary
2019 had been a fun ride for pension plan sponsors through the start of May, however the past few weeks have been less than fun. Year-to-date performance is still likely to be positive for most plans, but falling interest rates and negative equity returns during the month likely took a big chunk out of 2019’s gains. There’s no silver lining to be found here, as May was a bad month all around for pension plans.
Discount Rates & Asset Returns
Discount rates decreased sharply in May, dropping 0.22%. Current rates are now down 0.53% since year end 2018 and are 0.33% lower than rates from this time last year. The FTSE pension discount index finished May at 3.69%.
Trade war fears sparked a flight to safety. Global equities decreased sharply in May. The US market decreased by 6.5% while developed international markets decreased 4.8% and emerging market equities by 7.3%. Interest rates declined while credit spreads widened. As a result, long dated and less risky fixed income increased in value while high yield decreased. US Long Treasury bonds were the best performers increasing 6.5%.
What’s New at R&M?
R&M Directors featured in Pensions & Investments
Commentary: The end of interest rate relief is coming…
Directors, Joe Anzalone and Michael Clark, give their commentary to Pensions & Investments on how low interest rates and the sunsetting of favorable funding rules will create significant increases in contribution requirements in the next few years.
River and Mercantile Releases their Q1 Annuity Purchase Update
Following the record-breaking $26.3 billion in 2018, total pension buyout sales eclipsed $4.7 billion in Q1 2019, an increase of 240% compared to Q1 2018. Sales were driven by many small and mid-sized deals, as well as one large placement of $1.8 billion by Lockheed Martin. Two thirds of PRT providers saw increased sales compared to Q1 last year.
Q: Will recent retirement plan legislation help our pension plan?
A: The House recently passed the SECURE Act. Amongst other things, this Act would provide reduced PBGC premiums to CSEC plans, minimum funding relief to community newspaper plans, and non-discrimination relief to closed plans.
Further broad-based PBGC relief could also be in the cards, with everything from a temporary pause in the indexing of premium rates all the way to resetting premiums back to their pre-PPA levels. With the PBGC’s single employer program showing a surplus late in 2018, scaling back on premiums makes a lot of sense.
Looking a bit further down the line, the newest mortality study from the Society of Actuaries points towards lower liabilities for most plans, though it could be a few years before this table is fully implemented into pension laws. And on the downside, minimum required contribution interest rates are set to start falling more rapidly starting in 2021, as the corridor set under HATFA & BBA 2015 begins to expand.
So there’s very little that can be counted on with any certainty, but there are many items to be aware of as you plan for the short, medium, and long term.
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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