Pension Indicator Updated for May 31, 2016

June 2016: “There’s Always Next Year…”

By: Mike Shebak, Senior Managing Director, Hartland

For over 50 years, Cleveland sports fans have ended every season saying the same thing, “there’s always next year.”

Cleveland’s championship drought is the longest, and most painful, of any city in our nation. Unless the Cavs can come back from a 2-0 deficit against the Warriors in this year’s NBA Finals, this season will unfortunately end in all too familiar fashion.

Pension plan sponsors are feeling similar fatigue with respect to interest rates.

Interest rates have remained at historic lows for years with long-term rates declining again during 2016. The 10 year U.S. Treasury yield moved up 2 basis points during May and ended the month at 1.85%.(1) The 10 Year yield started 2016 with a yield of 2.27%, falling to a low of 1.66% in mid-February.(1)

Most investors came into 2016 expecting higher interest rates but this has not yet occurred as many investors reduced risk amidst the volatile market environment, moving to safety, driving government bond yields lower.

The Fed is hinting at a June rate hike, but such a move would likely not impact long-term rates, but instead impact the short-end of the curve. With the U.S. 10 Year Treasury currently hovering below 2.0%, the anticipation of higher rates and the benefit it would have on pension funded status feels a little like that of a Cleveland sports fan. “there’s always next year…”

Capital Markets
Markets bounced around without a clear sense of direction during May. U.S. Equity markets produced positive returns during the month while most international equity markets finished in negative territory and fixed income returns were modest.

A pick-up in economic growth and inflation could provide the Federal Reserve with enough confidence to raise rates again rather soon. Minutes from the Fed’s April meeting showed most officials considered it appropriate to raise rates in June if data continued to support an improvement in second quarter growth. The market was generally not expecting a June rate increase to even be a possibility before the release of those minutes. The market is pricing in a low probability of a June rate hike with July being a more realistic possibility, although data and global economic events will impact the timing of the Fed’s next move.

Funded Status Changes
Plan funded statuses were relatively unchanged during the month as investment portfolios generated little by way of return and interest rates remained unchanged.

(1) Bloomberg

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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.

July 1, 2015 to Date Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) -3.7% -3.0% -1.4% 0.9%
 Recently Frozen -5.5% -4.9% -3.3% -1.1%
 Ongoing Traditional -7.5% -6.9% -5.3% -3.2%
 Cash Balance -4.2% -3.5% -1.9% 0.4%
Month-over-Month Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) 0.6% 0.6% 0.6% 0.6%
 Recently Frozen 0.7% 0.6% 0.6% 0.7%
 Ongoing Traditional 0.7% 0.7% 0.6% 0.7%
 Cash Balance 0.7% 0.6% 0.6% 0.6%
12-Month Change Investment Mix 
Plan TypeAggressiveBalancedLDI LiteLDI
 Frozen (for several years) -4.5%  -3.3% -1.0% 2.8%
 Recently Frozen -5.6% -4.4% -2.1% 1.6%
 Ongoing Traditional -6.9% -5.7% -3.5% 0.2%
 Cash Balance -4.9% -3.7% -1.4% 2.4%