March 2019 Pension Finance Update

Pension finances slipped in March due to falling interest rates. Both model plans we track[1] lost ground last month: Plan A dropped more than 2% but remains up 2% for the year, while Plan B lost close to 1% but remains ahead 1% through the first three months of 2019:

Assets

Stocks were mixed in March, with most indexes gaining slightly during the month. For the year, all the indexes we track earned double-digit returns during the first quarter. The table below summarizes returns on various stock indexes included in our model portfolio:

Bonds gained 2%-4% last month, driven by lower interest rates. For the year, bonds have earned 3%-6%, with long duration and corporate bonds performing best.

Overall, our traditional 60/40 portfolio gained almost 2% in March and is now up 9% for the year, while the conservative 20/80 portfolio gained more than 2% last month and is up more than 6% during 2019.

Liabilities

Pension liabilities (for funding, accounting, and de-risking purposes) are driven by market interest rates. The graph on the left compares our Aa GAAP spot yield curve at December 31, 2018, and March 31, 2019, and it also shows the movement in the curve last month. The graph on the right shows our estimate of movements in effective GAAP discount rates for pension obligations of various duration during 2019:

Interest rates plunged more than 0.25% in March, increasing pension liabilities 3%-5%. For the year, liabilities are now up 5%-8%, with long duration plans seeing the largest increases.

Summary

Interest rates, which moved higher during most of 2018, have fallen sharply this year. This movement has pushed up pension liabilities, negating much of the benefit of higher stock prices in 2019, although pension plans remain modestly in the black so far this year. The graphs below show the progress of assets and liabilities for our two model plans this year: 

Looking Ahead

Pension funding relief has reduced required plan funding since 2012, but under current law, this relief will gradually sunset by 2022, increasing funding requirements for pension sponsors that have only made required contributions. 

Discount rates fell by more than 0.25% last month. We expect most pension sponsors will use effective discount rates in the 3.6%-4.0% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2019, along with estimates for 2020. Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.

[1]Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a largely retired plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. We assume overhead expenses of 1% of plan assets per year, and we assume the plans are 100% funded at the beginning of the year and ignore benefit accruals, contributions, and benefit payments in order to isolate the financial performance of plan assets versus liabilities.