Pension Indicator Updated for December 31, 2019

Perception Versus Reality- How Mindset Will Impact How You Feel About 2019 Performance

By: Matthew Klein, Principal, Findley

I surmise that most plan sponsors will feel like 2019 should have been a great year for pension plan funding and will end up disappointed when they receive their year-end information. If you follow along here regularly, the information here was telling you that things weren’t as great as they may have seemed on the nightly news (do people still watch?), or to sound more hip, what they are being fed on their Twitter feed. For as well as the domestic equity markets did in 2019- and well they did with the Dow Jones Index up around 22% and the S&P 500 up around 29%- pension plan funded status won’t be improved anywhere near those levels. In fact, as you can see in the graphs below, some plans may experience a decrease in funded status compared to a year ago.

There are a few reasons for this. First of all, no plan sponsor would or should invest 100% of the plan’s assets in domestic equities. But far more importantly, yields on corporate bonds are about a full percent (100 basis points) lower since a year ago. Understanding that pension plans have long tails- even a plan that has been frozen for many years could have a duration of 10 or more- these are very interest-sensitive measurements.

To illustrate this simply, you have a pension plan with only two investments, 60% in an index equity fund and 40% in a bond fund. The equity fund returned 25% in 2019 and the bond fund returned 10%. Given their weightings, the overall fund returned 19% in 2019. Sounds great, right? However, if the duration of my liability is 15, then our liabilities are up 15% based on the decreasing bond yields during 2019. So the pension plan’s funded status is only better off by around 4%. And if the duration is 20, the plan actually went in the wrong direction.

Based on my experience with C-suite executives over the years, it almost seems years like this frustrate them more than when the equity markets are down. There is a basic understanding that markets go up and down. When the equity markets are down, its news and people expect things to be worse. But in a year where the perception is things should be way up, a modest improvement could lead to disappointment.

As always, thanks for reading, and drop us a comment on how we're doing.

This email address is being protected from spambots. You need JavaScript enabled to view it. or Clearstead  to discuss this information further.

For more information on the development of the Pension Indicator, please see our Disclosure document.

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) 4.1% 3.5% 4.5% 5.3%
 Recently Frozen 0.1% -0.4% 0.6% 1.3%
 Ongoing Traditional -3.8% -4.3% -3.4% -2.7%
 Cash Balance 3.1% 2.5% 3.5% 4.2%
Month-over-Month Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 2.7% 2.1% 1.5% 0.6%
 Recently Frozen 3.2% 2.6% 2.0% 1.1%
 Ongoing Traditional 3.7% 3.1% 2.4% 1.5%
 Cash Balance 2.8% 2.2% 1.6% 0.7%
12-Month Change Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 4.1% 3.5% 4.5% 5.3%
 Recently Frozen 0.1% -0.4% 0.6% 1.3%
 Ongoing Traditional
-3.8% -4.3% -3.4% -2.7%
 Cash Balance 3.1% 2.5% 3.5% 4.2%

Frozen Plan 7 31

Recently Frozen Plan 7 31

Ongoing Plan 7 31

Cash Balance 7 31