Pension Indicator Updated for January 31, 2016


January 2016: Markets down, rates lower… LDI?

By: Mike Shebak, Senior Managing Director, Hartland

Underfunded pension plan investment portfolios are likely positioned for growth in equity markets and rising interest rates to help close the funding gap. Well-funded pension plan investment portfolios, or those that are risk averse, may have adopted a form of LDI in recent years to ward off unexpected declines in equities or drops in interest rates.

January was a reminder of the risks pension plans face: volatility in equity and risk assets and unpredictability in interest rates.

Markets and Rates

The equity markets got off on the wrong foot to start 2016 with the S&P 500 posting a 5.0% loss in January and that was only after paring losses with a late month rally. Oil continued to be the story, falling to under $27 per barrel1 (a twelve year low) before recovering to the mid $30s. The price of oil has continued to dictate many short-term market fluctuations.

Foreign equity markets sold off with developed markets represented by the MSCI EAFE Index declining 7.2%. The Bank of Japan’s surprise decision to charge banks for holding reserves led to a strong equity rally on the last day of January.

The MSCI Emerging Markets Index fell an additional 6.5% in January after 2015’s 14.6% decline. Low commodity prices continue to contribute to market volatility as many sovereigns have been selling liquid equity securities to meet financial obligations.

Most investors came into 2016 expecting higher interest rates but the opposite occurred in January as investors reduced risk amidst the volatile market environment. Interest rates moved lower as investors moved to safety, driving government bond yields even lower. The 10 year U.S. Treasury moved below 2.0% by month’s end.

Impact on plans

Based on the assumption in the Pension Indicator model, we estimate that Growth and Balanced portfolios, with approximately 60-75% of assets in risk oriented assets, were down 2.5% to 3.5% in January. Including the impact of the drop in interest rates during the month, the funding status of these plans declined by 3.5% to 4.5% during the month. This is a reminder of the risks plan sponsors face amidst short-term market volatility.

For the most part, full LDI strategies, with a high level of long-duration fixed income (~85%) held in there during a challenging month. Based on the assumption in the Pension Indicator model, we estimate that Full LDI portfolios, with approximately 85% of assets in liability hedging assets, were flat to slightly positive in January. Well-funded plans that have adopted an LDI strategy only saw their funding status widen by 1%.

As all plan sponsors know, there is no silver bullet to protecting a pension plan funding status. However, in a very challenging first month of the year for plan sponsors, LDI portfolios should have protected better than other portfolio strategies and served their role here in the short-term.

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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 indicate of future results.

July 1, 2015 to Date Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) -9.6% -8.0% -5.7% -2.2%
 Recently Frozen -10.2% -8.6% -6.4% -2.8%
 Ongoing Traditional -10.8% -9.2% -7.0% -3.5%
 Cash Balance -9.8% -8.2% -6.0% -2.4%
Month-over-Month Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) -4.6% -3.6% -2.5% -0.9%
 Recently Frozen -4.7% -3.6% -2.5% -1.0%
 Ongoing Traditional -4.8% -3.7% -2.6% -1.0%
 Cash Balance -4.7% -3.6% -2.5% -1.0%
12-Month Change Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) 2.7%  2.7% 1.9% 1.2%
 Recently Frozen 6.6% 6.6% 5.8% 5.0%
 Ongoing Traditional 11.1% 11.1% 10.2% 9.4%
 Cash Balance 3.3% 3.3% 2.6% 1.8%