Pension Indicator Updated for January 31, 2019

Two Months that Highlight the Importance of Discipline

By: Grant Guyuron, Senior Managing Director, Clearstead

December was not pretty for underfunded or unhedged pension plans.  Equities plummeted and interest rates dropped despite wider credit spreads.  That combination was a double whammy for plan sponsors as assets declined and liabilities increased.  Coming into calendar year 2019, it’s safe to say that many plan sponsors may have been disappointed with their plan’s funded status despite liabilities that may have dropped due to higher discount rates for the full 2018 calendar year.

One question that might arise is, what did plan sponsors do after the equity market correction in December?  Was the portfolio rebalanced back to targets?  Did the plan sponsor or consultant consider the glide path position and make any adjustments?  If either was the case, one would have been rewarded from putting more money into the equity and credit markets ahead of a significant January rally.  In the month, U.S. equities (Russell 3000 Index) returned 8.6% and international equities (MSCI ACWI ex USA) returned 7.6%.  Emerging market debt, high yield bonds, and MLPs were other strong performers in the month.  Meanwhile, most pension liabilities were positive (+2.56% - +3.19%)1  but lagged equity markets.

The Pension Indicator Growth allocation (which has meaningful equity exposure) returned 5.77% in January, which may have outpaced the liability by 2.5-3%1, depending on the liability duration.  A higher equity allocation in the month resulting from disciplined rebalancing supported higher asset returns and thus would have improved the plan’s funded status.  Could markets have continued to fall?  Yes, of course.  However, the investment professionals overseeing the portfolio should be able to make reasonable judgments when irrational sell-offs occur and follow a disciplined process to rebalance in such situations.  The last two months highlight the importance of having a disciplined process and sticking to it.

1 FTSE Pension Liability Index and FTSE Pension Liability Index - Short

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Information provided in this article is general in nature, is provided for informational purposes only, and should not be construed as investment advice. Performance data represents past performance.  Past performance is not indicative of future results.

Year to Date Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 3.3% 2.5% 1.9% 1.2%
 Recently Frozen 2.9% 2.1% 1.5% 0.8%
 Ongoing Traditional 2.4% 1.6% 1.1% 0.4%
 Cash Balance 3.1% 2.3% 1.7% 1.1%
Month-over-Month Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 3.3% 2.5% 1.9% -1.2%
 Recently Frozen 2.9% 2.1% 1.5% 0.8%
 Ongoing Traditional 2.4% 1.6% 1.1% 0.4%
 Cash Balance 3.1% 2.3% 1.7% 1.1%
12-Month Change Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 0.0% 0.4% 0.2% 0.6%
 Recently Frozen 1.3% 1.7% 1.5% 1.9%
 Ongoing Traditional
2.7% 3.1% 2.9% 3.4%
 Cash Balance 0.1% 0.6% 0.4% 0.8%




Cash Balance0119




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