October 2015 Pension Finance Update

Pension sponsors saw an improvement in funded status during October, as both stocks and interest rates moved higher. Both model pension plans we track gained ground last month: Plan A picked up almost 5% during October and is now ahead 3% for the year, while Plan B improved close to 2% last month and is now up almost 2% on the year through October.


Stocks enjoyed their strongest month of the year in October, with all flavors of stocks posting strong gains: the NASDAQ was up more than 9%, the S&P 500 gained more than 8%, the overseas EAFE index jumped more than 6%, and the small-cap Russell 2000 added almost 6%. Through October, the NASDAQ has performed best so far in 2015, up 7%, while the S&P 500 has gained 3%, the EAFE index is ahead 1%, and the Russell 2000 has lost more than 2%.

A diversified stock portfolio gained close to 8% in October, and is now up 2%-3% on the year.

Bonds lost less than 1% last month as interest rates edged up less than 0.1%. For the year, a diversified bond portfolio remains flat to up 1%, with short duration bonds and Treasuries performing best so far in 2015.

Overall, our traditional 60/40 portfolio gained more than 4% during October and is now up 2% for the year, while a conservative 20/80 portfolio earned more than 1% last month and is now flat to up 1% for the year.


Both funding and accounting liabilities are now driven by market interest rates. The graph on the left compares Treasury STRIPs yields at December 31, 2014, and October 31, 2015, 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 2015 so far:

Interest rates rose less than 0.1% during October and corporate bond yields are now about 0.30% higher than at the end of 2014 (Treasuries have risen about 0.15% this year, so credit spreads have increased 0.15% during 2015.) Last month’s move left pension liabilities largely unchanged during October and about 1% lower than at December 31, 2014.


After a difficult third quarter, pension sponsors enjoyed a nice lift in October and are now modestly in the black for 2015 through ten months:

Looking Ahead

The Obama Administration and Congressional leaders passed a budget last week 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 a bit last month. Most pension sponsors are using rates of 3.8%-4.5% to measure pension liabilities for accounting purposes in today’s environment.

The table below summarizes rates that plan sponsors are required to use for IRS funding purposes for 2015, along with estimates for 2016. 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 cash balance plan (duration 9 at 5.5%) with a 20/80 allocation with a greater emphasis on corporate and long-duration bonds. For both plans, we assume the plan is 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.