February 2017 Pension Finance Update

March 07, 2017

Pension sponsors enjoyed a second month of modest improvement in finances during February on the strength of strong stock markets. Both model pension plans we track1 gained ground again last month: Plan A improved 1% in February and is now up 2% this year, while Plan B added a fraction and is now up almost 1% total through the first two months of the year:


Stocks gained ground again in February: the S&P 500 and NASDAQ both gained almost 4%, while the small-cap Russell 2000 and overseas EAFE index were up 2%. Through two months this year, the NASDAQ is 8% ahead, the S&P 500 is up 6%, the Russell 2000 has gained more than 2%, and the EAFE index is up more than 5%.

A diversified stock portfolio gained 3% in February and is now up almost 6% through the first two months of 2017.

Bonds enjoyed a good month due to lower interest rates, adding about 1% during February. For the year, bonds are now 1%-2% ahead, on the month, with longer duration bonds and corporates doing best.

Overall, our traditional 60/40 portfolio gained more than 2% in February and is now up 3%-4% for the year, while the conservative 20/80 portfolio gained more than 1% last month and is now up 2% during 2017.


Pension liabilities (for funding, accounting, and de-risking purposes) are now driven by market interest rates. The graph on the left compares Treasury STRIPs yields at December 31, 2016, and February 28, 2017, and also shows the movement in rates last month. The graph on the right shows our estimate of movements in effective GAAP discount rates for pension obligations of various duration during 2017:

Yields fell about 0.1% across most maturities last month after being basically flat during January.

The move pushed pension liabilities up 1%-2% last month on top of a tiny increase in January. Long duration plans are seeing the biggest increases.


Two months into 2017, sponsors have enjoyed modest improvement in funded status this year.

The graphs below show the movement of assets and liabilities for our two model plans this year:

Looking Ahead

Congress passed a budget in 2015 that includes a third round of pension funding relief since 2012. The upshot is that pension funding requirements over the next several years will not be appreciably affected by current low interest rates (unless these rates persist). Required contributions for the next few years will be lower and more stable than under prior law.

Discount rates moved down about 0.1% last month. We expect most pension sponsors will use effective discount rates in the 3.7%-4.3% range to measure pension liabilities right now.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2017, along with estimates for 2018. Pre-relief, both 24-month averages and December ‘spot’ rates, which are still required for some calculations, such as PBGC premiums, are also included.

1Plan A is a traditional plan (duration 12 at 5.5%) with a 60/40 asset allocation, while Plan B is a cash balance 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.

October Three Consulting, LLC is a full service actuarial, consulting and technology firm that is a leading force behind the reemergence of defined benefit plans across the country. A primary focus of the consultants at October Three is the design and administration of comprehensive retirement benefits to employees that minimize the financial risks and volatility concerns employers face.

Through effective plan design strategies October Three believes successful financial outcomes are achievable for employers and employees alike. A critical element of those strategies is the ReDB® plan design. The ReDefined Benefit Plan® represents an entirely new, design-based approach to retirement and to the management of both the employer’s and the employee’s financial risk, focusing on maximizing financial efficiency and employee value.

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