Pension Indicator Updated for May 31, 2020

What's a Plan Sponsor to Do?

By: Grant Guyuron, Senior Managing Director, Clearstead

These are certainly odd and uncertain times. First the pandemic, then the brief threat (still?) of “murder hornets,” and now protests and violence in our streets. We first want to acknowledge the pain and suffering that so many are experiencing today and express our hope for good health, peace, respect, and equality for all our country’s citizens.

From the perspective of a defined benefit pension plan sponsor, there is also great uncertainty in how to treat one’s investments. In just a few months, we have experienced the fastest bear market in history, all-time lows on the 10-Year U.S. Treasury bond yield, and an almost inexplicable rebound in equity markets. It is anyone’s guess how quickly the economy will normalize, companies will rehire employees, the masses will be willing to travel or go to restaurants, or if we will experience a second wave of closures related to COVID-19. Despite all of that, the S&P 500 is trading about 10% below its all-time high (reached in February).

So, what do you do with your investments as a pension plan sponsor given low rates and relatively lofty equity market valuations? The answer (that nobody likes to hear) is that it depends! Some of the questions we consider are:

  • What is the Plan’s current funded status?
  • What are the objectives for the Plan? (e.g. terminate, hibernate, maintain)
  • How is your business doing and do you expect to make cash contributions?
  • What is the Plan and/or organization’s tolerance for risk?

Once we have these answers, we can make more informed recommendations. For some clients (ongoing plans), the answer recently has been to rebalance their portfolios and “re-risk;” we delivered that message in March. For well-funded, frozen plans, the answer may have been to stay the course or modestly increase credit exposure vs. Treasuries to take advantage of meaningful spread widening that occurred in the corporate bond markets. Today, with the large recovery that we have seen from equity markets, we are leaning more heavily into credit with many clients and staying close to policy targets. However, I will reiterate that our advice is completely dependent on the objectives and constraints of our clients.

May was generally a good month for underfunded plans more heavily invested in equities. The S&P 500 returned +4.8% in the month while the MSCI ACWI ex USA Index returned +3.3%. Pension liabilities generally increased in the month due to tighter credit spreads, but plan sponsors should have been able to modestly close the funding gap given the strong equity market returns.

From all of us at Findley and Clearstead, we hope everyone and their families are safe and healthy. 

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

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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) -12.0% -9.0% -6.4% -3.6%
 Recently Frozen -13.0% -10.1% -7.5% -4.8%
 Ongoing Traditional -14.1% -11.2% -8.6% -5.9%
 Cash Balance -12.4% -9.4% -6.8% -4.0%
Month-over-Month Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) 1.7% 1.2% 0.5% -0.3%
 Recently Frozen 2.1% 1.5% 0.9% 0.0%
 Ongoing Traditional 2.4% 1.9% 1.2% 0.4%
 Cash Balance 1.7% 1.1% 0.5% -0.4%
12-Month Change Investment Mix 
Plan TypeGrowthBalancedLDI LiteLDI
 Frozen (for several years) -5.6% -3.0% -0.1% 2.5%
 Recently Frozen -8.5% -6.0% -3.1% -0.6%
 Ongoing Traditional
-11.3% -8.9% -6.1% -3.7%
 Cash Balance -6.4% -3.8% -0.9% 1.7%


Frozen Plan 7 31

Recently Frozen Plan 7 31

Ongoing Plan 7 31

Cash Balance 7 31

Disclosure