March 2017 Pension Finance Update

The short version is: good month, good quarter. Pension sponsors made it three for three so far in 2017 with another modestly positive month for pension finance. Stocks gained a bit last month, while interest rates also edged up, shaving pension liabilities. Both model pension plans we track1 gained ground again in March: Plan A improved 1% and is now up 3% this year, while Plan B added a fraction and is now up 1% through the first quarter of 2017.


Stocks were flat to up in March: the S&P 500 and small-cap Russell 2000 both broke even last month, while the NASDAQ added more than 1% and the overseas EAFE index was up almost 3%. Through the first quarter this year, the NASDAQ is 10% ahead, the S&P 500 is up 6%, the Russell 2000 has gained more than 2%, and the EAFE index is up more than 8%.

A diversified stock portfolio gained 1% in March and is now up almost 7% through the first quarter of 2017.

Bonds lost a fraction of 1% in March as interest rates edged up modestly. For the year, bonds remain up more than 1% through the first quarter, with longer duration bonds and corporates doing best.

Overall, our traditional 60/40 portfolio gained less than 1% in March and is now up 4% for the year, while the conservative 20/80 portfolio was flat last month and remains 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 March 31, 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 moved up about 0.05% across most maturities last month and are now just a few basis points lower than they ended 2016.

The move pushed pension liabilities down less than 1% in March, leaving liabilities about 1% higher during 2017, with long duration plans seeing the biggest increases.


Pension finances rebounded sharply from the trough last summer with a very strong second half in 2016. So far this year, plans have consolidated these gains with three months of modest incremental improvement.

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 up less than 0.1% last month. We expect most pension sponsors will use effective discount rates in the 3.8%-4.4% 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.