April 2019 Pension Finance Update

Pension finances bounced back in April due to higher stock prices and higher interest rates. Both model plans we track gained ground last month: Plan A added more than 2% and is now up almost 5% for the year, while Plan B gained close to 1% and is now up 2% through the first four months of 2019:

Assets

Stocks gained ground in April and are up impressively so far in 2019. The table below summarizes returns on various stock indexes included in our model portfolio

Bonds lost less than 1% during April, as interest rates crept higher. For the year, bonds have earned 3%-5%, with corporate bonds performing best, reflecting a tightening of credit spreads this year.

Overall, our traditional 60/40 portfolio gained 2% in April and is now up 11% for the year, while the conservative 20/80 portfolio gained less than 1% last month and is up 7% 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 April 30, 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:

Corporate bond yields rose less than 0.1% in April, decreasing pension liabilities less than 1%. For the year, liabilities remain up 5%-7%, with long duration plans seeing the largest increases.

Summary

Interest rates have fallen about 0.4% this year, pushing pension liabilities higher, but stock market gains have outpaced this increase, producing net improvement in pension finances. The graphs below show the progress of assets and liabilities for our two model plans through the first four months of 2019: 

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 rose by less than 0.10% last month. We expect most pension sponsors will use effective discount rates in the 3.7%-4.1% 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.